-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DX5scjvM51h4wz1qfBZlVc5btW4jfsCe9q9H9S55rQ6r9z7HqcIsFHLGluQzsQTz RPverCsxGyvIOwJSuE+J+Q== 0000893220-02-000205.txt : 20020414 0000893220-02-000205.hdr.sgml : 20020414 ACCESSION NUMBER: 0000893220-02-000205 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20020228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TECHNITROL INC CENTRAL INDEX KEY: 0000096763 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 231292472 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-81286 FILM NUMBER: 02562483 BUSINESS ADDRESS: STREET 1: 1210 NORTHBROOK DR STREET 2: SUITE 385 CITY: TREVOSE STATE: PA ZIP: 19053 BUSINESS PHONE: 2153552900 MAIL ADDRESS: STREET 1: 1210 NORTHBROOK DR STREET 2: STE 385 CITY: TREVOSE STATE: PA ZIP: 19053 S-3/A 1 w56785a1s-3a.txt TECHNITROL, INC. - AMENDMENT #1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 2002 REGISTRATION NO. 333-81286 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ TECHNITROL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) PENNSYLVANIA 23-1292472 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1210 NORTHBROOK DRIVE SUITE 385 TREVOSE, PA 19053 (215) 355-2900 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ DREW A. MOYER CORPORATE CONTROLLER AND SECRETARY 1210 NORTHBROOK DRIVE SUITE 385 TREVOSE, PA 19053 (215) 355-2900 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: JOHN F. DOUGHERTY, JR., ESQUIRE BABAK YAGHMAIE, ESQUIRE ERIC D. SCHOENBORN, ESQUIRE ADAM M. DINOW, ESQUIRE STRADLEY, RONON, STEVENS & YOUNG, LLP WILSON SONSINI GOODRICH & ROSATI, 2600 ONE COMMERCE SQUARE PROFESSIONAL CORPORATION PHILADELPHIA, PENNSYLVANIA 19103-7098 12 EAST 49TH STREET, 30TH FLOOR (215) 564-8000(T) NEW YORK, NEW YORK 10017 (215) 564-8120(F) (212) 999-5800(T) (212) 999-5899(F)
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement is declared effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ------------ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ------------ If delivery of this prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (SUBJECT TO COMPLETION) ISSUED , 2002 5,600,000 Shares [TECHNITROL LOGO] COMMON STOCK ------------------------ TECHNITROL, INC. IS OFFERING 5,600,000 SHARES OF ITS COMMON STOCK. ------------------------ OUR COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL "TNL." ON FEBRUARY 26, 2002, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE NEW YORK STOCK EXCHANGE WAS $21.30 A SHARE. ------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS TECHNITROL, INC. ----------------- ----------------- ----------------- Per Share............................... $ $ $ Total................................... $ $ $
Technitrol, Inc. has granted the underwriters the right to purchase up to an additional 840,000 shares to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 2002. ------------------------ MORGAN STANLEY CREDIT SUISSE FIRST BOSTON LEGG MASON WOOD WALKER INCORPORATED , 2002 [LOGO OF PULSE]
[Picture of PulseJack(TM) stacked connector [Picture of ultra-high-current module with integrated noise filters] power inductor]
[Picture of filter module for a [Picture of digital variety of appliances] subscriber line choke]
- -------------------------------------------------------------------------------- [LOGO OF AMI DODUCO] [Pictures of component subassemblies for telecommunications, machinery and consumer electronics] TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 1 Risk Factors.......................... 5 Forward Looking Statements............ 11 Use of Proceeds....................... 12 Price Range of Common Stock........... 13 Dividend Policy....................... 13 Capitalization........................ 14 Selected Consolidated Financial Data................................ 15 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 16
PAGE ---- Business.............................. 28 Management............................ 37 Principal Shareholders................ 39 Description of Capital Stock.......... 41 Underwriters.......................... 44 Legal Matters......................... 47 Experts............................... 47 Where You Can Find More Information... 47 Incorporation of Certain Information by Reference........................ 48 Index to Consolidated Financial Statements and Financial Statement Schedule............................ F-1
------------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK, ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR ANY SALE OF COMMON STOCK. ------------------------ Technitrol(TM), Pulse(TM) , AMI Doduco(TM) and PulseJack(TM) are some of our trademarks. Other marks used in this prospectus are the property of their respective owners, which includes us in some instances. i PROSPECTUS SUMMARY This summary highlights information contained elsewhere in or incorporated by reference into this prospectus. You should read the entire prospectus carefully, including the section entitled "Risk Factors." TECHNITROL, INC. We are a global producer of precision-engineered passive magnetics-based electronic components and electrical contact products and materials. We believe we are a leading global producer of these products and materials in the primary markets we serve. Passive magnetics-based products are used in virtually all types of electronic products to manage and regulate electronic signals and power. Electrical contact products and materials are used in any device in which the continuation or interruption of electrical currents is necessary. In each case, our components are critical to the functioning of the end product. Our world-class design and manufacturing capabilities, together with the breadth of our product offerings, provides us with a competitive advantage that enables us to anticipate and deliver highly customized solutions for our customers' product needs. In addition, our global presence enables us to participate in all relevant product and geographic markets and provides us with proximity to our global customer base. This allows us to better understand and more easily satisfy our customers' unique design and product requirements. We operate our business in two segments: the electronic components segment, which operates under the name Pulse, and the electrical contact products segment, which operates under the name AMI Doduco. Pulse designs and manufactures a wide variety of highly-customized passive magnetics-based electronic components. These components manage and regulate electronic signals and power for use in a variety of devices by filtering out radio frequency interference and adjusting and ensuring proper current and voltage. These products are often referred to as chokes, inductors, filters and transformers. Pulse's products are critical components within end products sold by many leading technology companies, such as Alcatel, Cisco and Intel. Pulse's products are used in industries that are characterized by continuous product innovation, such as telecommunications, enterprise networking and power conversion. As a result, Pulse's products are characterized by short life cycles and historically higher sales growth and gross margins than those of AMI Doduco. Representative end products that use Pulse's products include Ethernet switches, voice over Internet equipment, broadband access equipment and power supplies. We believe AMI Doduco is the only global manufacturer that produces a full range of electrical contact products, from contact materials to completed contact subassemblies. Contact products complete or interrupt electrical circuits in virtually every electrical device. These products are generally characterized by longer life cycles and slower technological change than Pulse's products. AMI Doduco sells its products to global equipment manufacturers such as Eaton, GE and Siemens. We believe that expansion and technological developments in some of the industries served by AMI Doduco, particularly in the electric power, appliance and automotive industries, along with opportunities arising from customer outsourcing and consolidation of the electrical contact industry, present attractive growth opportunities for AMI Doduco. Representative end products that use AMI Doduco's products include electrical circuit breakers, switches and relays, motor and temperature controls, wiring devices, power substations and sensors. OUR BUSINESS STRATEGY Our overall strategy is to further enhance our market positions. In order to accomplish this we intend to: -- Focus On Attractive Growth Markets. We seek to aggressively address and penetrate attractive markets for our products by employing our design and manufacturing expertise and pursuing our acquisition strategy. By doing so, we intend to achieve profitable growth and revenue diversification across end markets, geographies and customers. -- Utilize Our Engineering and Design Capabilities. We will continue to support and utilize our world-class engineering capabilities in order to achieve superior product and tooling designs for our 1 customers. Our customer collaborative design capabilities enable us to produce customized products early in their life cycle and typically provide us with higher margin opportunities. -- Achieve the Lowest Cost, Highest Quality Manufacturing. We strive to achieve the lowest manufacturing cost and the highest manufacturing quality. We seek to take advantage of low cost labor, selective automation and continuous improvement in our manufacturing processes in order to maximize cost efficiencies. -- Continue To Undertake Strategic Acquisitions and Attractive Outsourcing Opportunities. We intend to continue to pursue acquisitions and outsourcing opportunities to enhance growth, enter into new product markets and expand our design and manufacturing talent. We also expect this strategy will increase our global presence, consolidate markets within our existing product lines and enable us to offer a more comprehensive product line. -- Focus On Economic Profit and Financial Flexibility. We believe the most relevant indicator of shareholder value creation is economic profit, which we define as operating profit after tax less our cost of capital. We seek to maintain a strong balance sheet in order to maintain flexibility through the entire business cycle. OUR CORPORATE PROFILE We are a Pennsylvania corporation. Our principal executive offices are located at 1210 Northbrook Drive, Suite 385, Trevose, PA 19053, and our telephone number is (215) 355-2900. Our website is located at www.technitrol.com. Information on the website is not part of this prospectus. In this prospectus, unless the context otherwise requires, the terms "we," "us," "our," "the company," "the Company" and "Technitrol" refer to Technitrol, Inc. and its subsidiaries. References to Pulse refer to Pulse Engineering, Inc. and its subsidiaries. References to AMI Doduco refer to AMI Doduco, Inc. and its subsidiaries. 2 THE OFFERING Common stock offered by us.... 5,600,000 shares Common stock to be outstanding after this offering........... 39,319,912 shares Use of proceeds............... For voluntary repayment of approximately $50.0 million of indebtedness under our existing bank credit facility, potential strategic acquisitions and general corporate purposes, including working capital and capital expenditures. New York Stock Exchange symbol........................ TNL The number of shares outstanding after this offering is based on 33,719,912 shares outstanding as of February 26, 2002. Except as otherwise indicated, information in this prospectus assumes no exercise of the underwriters' option to purchase 840,000 additional shares. The above table excludes, as of February 26, 2002: -- 2,829,462 shares of common stock reserved for issuance under our incentive compensation plan, of which 232,700 shares are subject to outstanding options, with a weighted average exercise price of $21.87 per share, -- 963,508 shares of common stock currently reserved for issuance under our employee stock purchase plan, and -- 40,432 shares of common stock reserved for issuance under our board of directors stock plan. 3 SUMMARY CONSOLIDATED FINANCIAL DATA The following summary consolidated financial data should be read in conjunction with our financial statements and related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial data included elsewhere in this prospectus.
YEARS ENDED ---------------------------------------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 29, DEC. 28, 1997(1) 1998 1999 2000 2001 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF EARNINGS DATA: Net sales................................................... $397,067 $448,539 $530,436 $664,378 $474,199 Cost of sales............................................... 269,050 306,296 358,553 409,856 359,681 -------- -------- -------- -------- -------- Gross profit.............................................. 128,017 142,243 171,883 254,522 114,518 Selling, general and administrative expenses................ 82,264 88,827 110,694 131,113 98,837 Restructuring and unusual and infrequent items.............. -- -- -- 3,305 13,594 -------- -------- -------- -------- -------- Operating profit.......................................... 45,753 53,416 61,189 120,104 2,087 Interest and other, net..................................... (1,011) 1,073 2,180 (2,810) (3,282) -------- -------- -------- -------- -------- Earnings before income taxes.............................. 46,764 52,343 59,009 122,914 5,369 Income tax expense.......................................... 17,678 19,034 14,697 23,606 2,903 -------- -------- -------- -------- -------- Net earnings.............................................. $ 29,086 $ 33,309 $ 44,312 $ 99,308 $ 2,466 ======== ======== ======== ======== ======== Earnings per share: Basic(2).................................................. $ 0.90 $ 1.04 $ 1.38 $ 3.05 $ 0.07 Diluted(2)................................................ $ 0.90 $ 1.03 $ 1.36 $ 3.02 $ 0.07 Weighted average shares outstanding (basic)................. 32,186 31,962 32,092 32,510 33,202 Weighted average shares outstanding (diluted)............... 32,274 32,406 32,492 32,859 33,566 BALANCE SHEET DATA: Total assets................................................ $255,334 $344,134 $381,239 $520,771 $525,020 Total long-term debt (including current installments)....... 32,957 60,898 60,496 48,588 89,129 Shareholders' equity........................................ 142,375 174,809 215,635 324,430 329,231 Working capital(3).......................................... 87,618 102,336 141,851 230,397 189,257 Cash and cash equivalents................................... 48,803 13,563 88,161 162,631 142,267 OTHER DATA: Net cash provided by/(used in): Operating activities...................................... $ 23,734 $ 49,727 $ 69,252 $113,788 $ 62,686 Investing activities...................................... (6,931) (62,834) (32,928) (34,770) (124,151) Financing activities...................................... (9,387) 14,928 1,356 (4,796) 41,071 Capital expenditures, exclusive of acquisitions............. 13,447 20,398 18,766 29,976 13,149 Depreciation and amortization............................... 12,863 16,280 19,411 22,378 26,553 EBITDA(4)................................................... 58,616 69,696 80,600 142,482 28,640 Research, development and engineering expenses.............. 16,438 16,840 19,611 20,178 20,210 Dividends declared per share(2)(5).......................... $ 0.11 $ 0.12 $ 0.13 $ 0.14 $ 0.14
- ------------ (1) Amounts reflect continuing operations after disposition of the businesses comprising our Test and Measurement Segment which was divested on June 4, 1997 for approximately $34.0 million. (2) Per share amounts reflect two-for-one stock splits on November 27, 2000 and February 28, 1997. (3) Includes cash and cash equivalents and current installments of long-term debt. (4) EBITDA (earnings before interest, taxes, depreciation and amortization) is operating profit plus depreciation and amortization. EBITDA is not a measure of performance under accounting principles generally accepted in the United States. EBITDA should not be considered a substitute for, and an investor should also consider, cash flow from operations, net income and other measures of performance as defined by accounting principles generally accepted in the United States as an indicator of our profitability or liquidity. EBITDA is often used by shareholders and analysts as an indicator of a company's ability to service debt and fund capital expenditures. We believe it enhances a reader's understanding of our financial condition, results of operations and cash flow because it is unaffected by capital structure and therefore, enables investors to compare our operating performance to other companies. We understand that our presentation of EBITDA may not be comparable to other similarly titled captions of other companies due to differences in the method of calculation. (5) After January 25, 2002, we no longer intend to pay cash dividends on our common stock. 4 RISK FACTORS You should carefully consider the risks described below before making an investment decision in our common stock. Additional risks not currently known to us or that we now deem immaterial may also affect us and the value of your investment. CYCLICAL CHANGES IN THE MARKETS WE SERVE, INCLUDING THE CURRENT CONTRACTION, COULD RESULT IN A SIGNIFICANT DECREASE IN DEMAND FOR OUR PRODUCTS AND REDUCE OUR PROFITABILITY. Our components are used in various products for the electronic and electrical equipment markets. These markets are highly cyclical. The demand for our components reflects the demand for products in the electronic and electrical equipment markets generally. Beginning in early 2001 and continuing to the present, these markets, particularly the electronics market, have experienced a severe worldwide contraction. This contraction has resulted in a decrease in demand for our products, as our customers have: -- canceled many existing orders, -- introduced fewer new products, and -- worked to decrease their inventory levels. The decrease in demand for our products has had a significant adverse effect on our operating results and profitability. We cannot predict how long this contraction will last nor the strength of any recovery. Accordingly, we may continue to experience weakness in both our revenues and profits. REDUCED PRICES FOR OUR PRODUCTS MAY ADVERSELY AFFECT OUR PROFIT MARGINS IF WE ARE UNABLE TO REDUCE OUR COSTS OF PRODUCTION. The average selling prices for our products tend to decrease over their life cycle. In addition, the recent economic contraction has significantly increased the pressure on our customers to seek lower prices from their suppliers. As a result, our customers are likely to continue to demand lower prices from us. To maintain our margins and remain profitable, we must continue to meet our customers' design needs while reducing costs through efficient raw material procurement and process and product improvements. Our profit margins will suffer if we are unable to reduce our costs of production as sales prices decline. AN INABILITY TO ADEQUATELY RESPOND TO CHANGES IN TECHNOLOGY MAY DECREASE OUR SALES. Pulse operates in an industry characterized by rapid change caused by the frequent emergence of new technologies. Generally, we expect life cycles for our products in the electronic components industry to be relatively short. This requires us to anticipate and respond rapidly to changes in industry standards and customer needs and to develop and introduce new and enhanced products on a timely and cost effective basis. Our engineering and development teams place a priority on working closely with our customers to design innovative products and improve our manufacturing processes. Our inability to react to changes in technology quickly and efficiently may decrease our sales and profitability. IF OUR INVENTORIES BECOME OBSOLETE, OUR FUTURE PERFORMANCE AND OPERATING RESULTS WILL BE ADVERSELY AFFECTED. The life cycles of our products depend heavily upon the life cycles of the end products into which our products are designed. Many of Pulse's products have very short life cycles which are measured in quarters. Products with short life cycles require us to closely manage our production and inventory levels. Inventory may become obsolete because of adverse changes in end market demand. During market slowdowns, this may result in significant charges for inventory write offs, as was the case during 2001. Our future operating results may be adversely affected by material levels of obsolete or excess inventories. 5 AN INABILITY TO CAPITALIZE ON OUR RECENT OR FUTURE ACQUISITIONS MAY ADVERSELY AFFECT OUR BUSINESS. In recent years we have completed several acquisitions. We continually seek acquisitions to grow our business. We may fail to derive significant benefits from our acquisitions. In addition, if we fail to achieve sufficient financial performance from an acquisition, goodwill and other intangibles could become impaired, resulting in our recognition of a loss. While our acquisitions have not generally resulted in goodwill impairment in the past, we expect to have a goodwill impairment charge in the first quarter of 2002 of between $16 million and $19 million related to AMI Doduco. The degree of success of any of our acquisitions depends on our ability to: -- successfully integrate or consolidate acquired operations into our existing businesses, -- identify and take advantage of cost reduction opportunities, and -- further penetrate the markets for the product capabilities acquired. Integration of acquisitions may take longer than we expect and may never be achieved to the extent originally anticipated. This could result in slower than anticipated business growth or higher than anticipated costs. In addition, acquisitions may: -- cause a disruption in our ongoing business, -- distract our managers, -- unduly burden our other resources, and -- result in an inability to maintain our historical standards, procedures and controls. AN INABILITY TO IDENTIFY ADDITIONAL ACQUISITION OPPORTUNITIES MAY SLOW OUR FUTURE GROWTH. We intend to continue to identify and consummate additional acquisitions to further diversify our business and to penetrate important markets. We may not be able to identify suitable acquisition candidates at reasonable prices. Even if we identify promising acquisition candidates, the timing, price, structure and success of future acquisitions are uncertain. An inability to consummate attractive acquisitions may reduce our growth rate and our ability to penetrate new markets. IF OUR CUSTOMERS TERMINATE THEIR EXISTING AGREEMENTS, OR DO NOT ENTER INTO NEW AGREEMENTS OR SUBMIT ADDITIONAL PURCHASE ORDERS FOR OUR PRODUCTS, OUR BUSINESS WILL SUFFER. Most of our sales are made on a purchase order basis as needed by our customers. In addition, to the extent we have agreements in place with our customers, most of these agreements are either short term in nature or provide our customers with the ability to terminate the arrangement with little or no prior notice. Our contracts typically do not provide us with any material recourse in the event of non-renewal or early termination. We will lose business and our revenues will decrease if a significant number of customers: -- do not submit additional purchase orders, -- do not enter into new agreements with us, or -- elect to terminate their relationship with us. IF WE DO NOT EFFECTIVELY MANAGE OUR BUSINESS IN THE FACE OF FLUCTUATIONS IN THE SIZE OF OUR ORGANIZATION, OUR BUSINESS MAY BE DISRUPTED. We have grown rapidly over the last few years, both organically and as a result of acquisitions. However, in the past twelve months we have significantly reduced our workforce and facilities in response to a dramatic decrease in demand for our products due to prevailing global market conditions. These rapid fluctuations place strains on our resources and systems. If we do not effectively manage our resources and systems, our business may suffer. 6 UNCERTAINTY IN DEMAND FOR OUR PRODUCTS MAY RESULT IN INCREASED COSTS OF PRODUCTION AND AN INABILITY TO SERVICE OUR CUSTOMERS. We currently have very little visibility into our customers' purchasing patterns and are highly dependent on our customers' forecasts. These forecasts are non-binding and often highly unreliable. Given the fluctuation in growth rates and cyclical demand for our products, as well as our reliance on often imprecise customer forecasts, it is difficult to accurately manage our production schedule, equipment and personnel needs and our raw material and working capital requirements. Our failure to effectively manage these issues may result in: -- production delays, -- increased costs of production, -- an inability to make timely deliveries, and -- a decrease in profits. A DECREASE IN AVAILABILITY OR INCREASE IN COST OF OUR KEY RAW MATERIALS COULD ADVERSELY AFFECT OUR PROFIT MARGINS. We use several types of raw materials in the manufacturing of our products, including: -- precious metals such as silver, -- base metals such as copper and brass, and -- ferrite cores. Some of these materials are produced by a limited number of suppliers. From time to time, we may be unable to obtain these raw materials in sufficient quantities or in a timely manner to meet the demand for our products. The lack of availability or a delay in obtaining any of the raw materials used in our products could adversely affect our manufacturing costs and profit margins. In addition, if the price of our raw materials increases significantly over a short period of time, customers may be unwilling to bear the increased price for our products and we may be forced to sell our products containing these materials at prices that reduce our profit margins. Some of our raw materials, such as precious metals, are considered commodities and are subject to price volatility. We attempt to limit our exposure to fluctuations in the cost of precious materials, including silver, by holding the majority of our precious metal inventory through leasing or consignment arrangements with our suppliers. We then typically purchase the precious metal from our supplier at the current market price on the day after delivery to our customer and pass this cost on to our customer. In addition, leasing and consignment costs have historically been substantially below the costs to borrow funds to purchase the precious metals. We currently have four consignment or leasing agreements related to precious metals, all of which generally have one year terms with varying maturity dates, but can be terminated by either party with 30 days' prior notice. Our results of operations and liquidity will be negatively impacted if: -- we are unable to enter into new leasing or consignment arrangements with similarly favorable terms after our existing agreements terminate, or -- our leasing or consignment fees increase significantly in a short period of time and we are unable to recover these increased costs through higher sale prices. Fees charged by the consignor are driven by interest rates and the market price of the consigned material. The market price of the consigned material is determined by the supply of and the demand for the material. Consignment fees will increase if interest rates or the price of the consigned material increase. 7 COMPETITION MAY RESULT IN LOWER PRICES FOR OUR PRODUCTS AND REDUCED SALES. Both Pulse and AMI Doduco frequently encounter strong competition within individual product lines from various competitors throughout the world. We compete principally on the basis of: -- product quality and reliability, -- global design and manufacturing capabilities, -- breadth of product line, -- customer service, and -- price. Our inability to successfully compete on any or all of the above factors may result in reduced sales. OUR BACKLOG IS NOT AN ACCURATE MEASURE OF FUTURE REVENUES AND IS SUBJECT TO CUSTOMER CANCELLATION. While our backlog consists of firm accepted orders with an express release date generally scheduled within six months of the order, many of the orders that comprise our backlog may be canceled by customers without penalty. It is widely known that customers in the electronics industry have on occasion double and triple ordered components from multiple sources to ensure timely delivery when quoted lead time is particularly long. In addition, customers often cancel orders when business is weak and inventories are excessive, a process that we have experienced in the current contraction. Although you should not rely on our backlog as an indicator of our future revenues, our results of operations could be adversely impacted if customers cancel a material portion of orders in our backlog. FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES MAY ADVERSELY AFFECT OUR OPERATING RESULTS. We manufacture and sell our products in various regions of the world and export and import these products to and from a large number of countries. Fluctuations in exchange rates could negatively impact our cost of production and sales that, in turn, could decrease our operating results and cash flow. For example, there has been a material devaluation of the euro against the U.S. dollar in the last several years which has negatively impacted our reported profits. Although we engage in limited hedging transactions, including foreign currency contracts, to reduce our transaction and economic exposure to foreign currency fluctuations, these measures may not eliminate or substantially reduce our risk in the future. OUR INTERNATIONAL OPERATIONS SUBJECT US TO THE RISKS OF UNFAVORABLE POLITICAL, REGULATORY, LABOR AND TAX CONDITIONS IN OTHER COUNTRIES. We manufacture and assemble some of our products in foreign locations, including Estonia, France, Germany, Hungary, Italy, Mexico, the Philippines, the Peoples' Republic of China, or PRC, and Spain. In addition, approximately 64.9% of our revenues for the year ended December 28, 2001 were derived from sales to customers outside the United States. Our future operations and earnings may be adversely affected by the risks related to, or any other problems arising from, operating in international markets. Risks inherent in doing business internationally may include: -- economic and political instability, -- expropriation and nationalization, -- trade restrictions, -- capital and exchange control programs, -- transportation delays, -- foreign currency fluctuations, and 8 -- unexpected changes in the laws and policies of the United States or of the countries in which we manufacture and sell our products. In particular, Pulse has a significant portion of its manufacturing operations in the PRC. Our presence in the PRC has enabled Pulse to maintain lower manufacturing costs and to flexibly adjust its work force to demand levels for its products. Although the PRC has a large and growing economy, its potential economic, political, legal and labor developments entail uncertainties and risks. While the PRC has been receptive to foreign investment, we cannot be certain that its current policies will continue indefinitely into the future. In the event of any changes that adversely affect our ability to conduct our operations within the PRC, our business will suffer. In addition, we have benefitted over recent years from favorable tax treatment as a result of our international operations. We operate in foreign countries where we realize favorable income tax treatment relative to the U.S. statutory rate. We have also been granted special tax incentives commonly known as tax holidays in other countries such as the PRC and the Philippines. This favorable situation could change if these countries were to increase rates or revoke the special tax incentives, or if we discontinue our manufacturing operations in any of these countries and do not replace the operations with operations in other locations with favorable tax incentives. Accordingly, in the event of changes in laws and regulations affecting our international operations, we may not be able to continue to take advantage of similar benefits in the future. SHIFTING OUR OPERATIONS BETWEEN REGIONS MAY ENTAIL CONSIDERABLE EXPENSE. In the past we have shifted our operations from one region to another in order to maximize manufacturing and operational efficiency. We may close one or more additional factories in the future. This could entail significant one-time earnings charges to account for severance, equipment write offs or write downs and moving expenses. In addition, as we implement transfers of our operations we may experience disruptions, including strikes or other types of labor unrest resulting from lay offs or termination of employees. LIQUIDITY REQUIREMENTS COULD NECESSITATE MOVEMENTS OF EXISTING CASH BALANCES, WHICH MAY BE SUBJECT TO RESTRICTIONS OR CAUSE UNFAVORABLE TAX AND EARNINGS CONSEQUENCES. A significant portion of our cash is held offshore by our international subsidiaries and is predominantly denominated in U.S. dollars. If we encounter a significant domestic need for liquidity which we cannot fulfill through borrowings or other internal or external sources, we may experience unfavorable tax and earnings consequences as this cash is transferred to the United States. These adverse consequences would occur if the transfer of cash into the United States is taxed and no offsetting foreign tax credit is available to offset the U.S. tax liability, resulting in lower earnings. In addition, we may be prohibited from transferring cash from the U.S. With the exception of approximately $10.0 million of retained earnings as of December 28, 2001 in the PRC that are restricted in accordance with the PRC Foreign Investment Enterprises Law, substantially all retained earnings are free from legal or contractual restrictions. The PRC Foreign Investment Enterprise Law restricts 10% of our net earnings in the PRC, up to a maximum amount equal to 50% of the total capital we have invested in the PRC. We have not experienced any significant liquidity restrictions in any country in which we operate and none are presently foreseen. However, foreign exchange ceilings imposed by local governments and the sometimes lengthy approval processes which some foreign governments require for international cash transfers may delay our internal cash movements from time to time. LOSING THE SERVICES OF OUR EXECUTIVE OFFICERS OR OUR OTHER HIGHLY QUALIFIED AND EXPERIENCED EMPLOYEES COULD ADVERSELY AFFECT OUR BUSINESS. Our success depends upon the continued contributions of our executive officers, many of whom have many years of experience and would be extremely difficult to replace. We must also attract and maintain experienced and highly skilled engineering, sales and marketing and managerial personnel. Competition for qualified personnel is intense in our industries, and we may not be successful in hiring and retaining these 9 people. If we lose the services of our executive officers or cannot attract and retain other qualified personnel, our business could be adversely affected. ENVIRONMENTAL LIABILITY AND COMPLIANCE OBLIGATIONS MAY AFFECT OUR OPERATIONS AND RESULTS. Our manufacturing operations are subject to a variety of environmental laws and regulations governing: -- air emissions, -- wastewater discharges, -- the storage, use, handling, disposal and remediation of hazardous substances, wastes and chemicals, and -- employee health and safety. If violations of environmental laws should occur, we could be held liable for damages, penalties, fines and remedial actions. Our operations and results could be adversely affected by any material obligations arising from existing laws, as well as any required material modifications arising from new regulations that may be enacted in the future. We may also be held liable for past disposal of hazardous substances generated by our business or businesses we acquire. In addition, it is possible that we may be held liable for contamination discovered at our present or former facilities. We are aware of contamination at two locations. In Sinsheim, Germany, there is shallow groundwater and soil contamination that is naturally decreasing over time. The German environmental authorities have not required corrective action to date. In addition, property in Leesburg, Indiana, which was acquired with our acquisition of GTI in 1998, is the subject of a 1994 Corrective Action Order to GTI by the Indiana Department of Environmental Management. The order requires us to investigate and take corrective actions. Monitoring data is being collected to confirm and implement the corrective measures. We anticipate making additional environmental expenditures in future years to continue our environmental studies, analysis and remediation activities. Based on current knowledge, we do not believe that any future expenses or liabilities associated with environmental remediation will have a material impact on our operations or our consolidated financial position, liquidity or operating results, however, we may be subject to additional costs and liabilities if the scope of the contamination or the cost of remediation exceeds our current expectations. PENNSYLVANIA LAW AND OUR ORGANIZATIONAL DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE OR PREVENT A POTENTIAL TAKEOVER OF OUR COMPANY THAT MIGHT OTHERWISE RESULT IN SHAREHOLDERS RECEIVING A PREMIUM OVER THE MARKET PRICE FOR THEIR SHARES. Provisions of Pennsylvania law, our Rights Agreement and our articles of incorporation and bylaws could complicate the acquisition of us by means of a tender offer, a proxy contest, or otherwise, and the removal of incumbent officers and directors. These provisions include: -- Subsection 25F of the Pennsylvania Business Corporation Law, which prohibits various change of control transactions with a 20%-or-greater shareholder, such as a party that has completed a successful tender offer, until five years after that party became a 20%-or-greater shareholder, -- our Rights Agreement, known as a poison pill, which gives the board and shareholders the ability to severely dilute the ownership of any person acquiring 15% or more of our common stock, thereby making the acquisition impractical, -- our articles of incorporation, which require an affirmative vote of 75% of our outstanding shares of stock to approve various change of control transactions with a holder of more than 5% of our stock, and -- our classified board, which prevents a wholesale change in the board's composition. These provisions may have the effect of delaying, deterring or preventing a future takeover or change in control of us unless such takeover or change in control is approved by our board of directors. 10 FORWARD LOOKING STATEMENTS This prospectus contains forward-looking statements in "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere. Forward-looking statements reflect our current expectations of future events or future financial performance. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They often use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and similar terms. These forward-looking statements are based on our current plans and expectations. Any or all of our forward-looking statements in this prospectus may prove to be incorrect. They may be affected by inaccurate assumptions or by risks and uncertainties which are either unknown to us or not fully known or understood. Accordingly, actual outcomes and results may differ materially from what is expressed or forecasted in this prospectus. We sometimes provide forecasts of future financial performance. The risks and uncertainties described under "Risk Factors" as well as other risks identified from time to time in other Securities and Exchange Commission reports, registration statements and public announcements, among others, should be considered in evaluating our prospects for the future. We undertake no obligation to release updates or revisions to any forward-looking statement, whether as a result of new information, future events or otherwise. 11 USE OF PROCEEDS Our net proceeds from this offering will be approximately $112,866,000, based on the reported last sale price of our common stock on February 26, 2002 of $21.30 per share and after deducting the estimated underwriting discounts and commissions and offering expenses. If the underwriters exercise their over- allotment option in full, our net proceeds are estimated to be $129,863,400. We anticipate using the net proceeds to us from this offering for: -- voluntary repayment of approximately $50.0 million of indebtedness under our existing bank credit facility, -- potential strategic acquisitions, and -- general corporate purposes, including working capital and capital expenditures. While we are constantly assessing various acquisition opportunities, we currently do not have any binding commitments or agreements for any acquisitions. Until we use the net proceeds as described above, we intend to invest the net proceeds from this offering in short-term, investment grade interest bearing securities. As of February 26, 2002, $50.5 million was outstanding under our bank credit facility. Indebtedness under our credit facility accrues interest at variable rates. As of February 26, 2002, the weighted average interest rate on our credit facility borrowings was 2.8%. Amounts borrowed under our current credit facility, which was established on June 20, 2001, were used in connection with our acquisition of Excelsus, repayment of outstanding indebtedness under our previous credit facilities and for general corporate purposes. We must repay our indebtedness under our bank credit facility in full by June 20, 2004. 12 PRICE RANGE OF COMMON STOCK Our common stock is traded on the New York Stock Exchange under the ticker symbol "TNL." The following table reflects the highest and lowest sales prices per share of our common stock for the periods indicated. All amounts reflect stock splits through February 26, 2002.
COMMON STOCK PRICE ---------------- HIGH LOW ------ ------ 2002 First Quarter (through February 26, 2002)................... $31.40 $20.12 2001 Fourth Quarter.............................................. 28.42 21.80 Third Quarter............................................... 26.80 20.53 Second Quarter.............................................. 33.89 19.60 First Quarter............................................... 57.00 21.75 2000 Fourth Quarter.............................................. 62.13 36.56 Third Quarter............................................... 76.13 45.50 Second Quarter.............................................. 49.28 24.31 First Quarter............................................... 30.63 19.38
On February 26, 2002, the reported last sale price of our common stock on the New York Stock Exchange was $21.30 per share. On February 26, 2002, there were approximately 1,875 registered holders of our common stock, which is our only class of stock outstanding. DIVIDEND POLICY During fiscal years 2000 and 2001, we paid a quarterly dividend to our shareholders of $0.03375 per share. After paying a dividend of $0.03375 on January 25, 2002 to shareholders of record on January 4, 2002, we no longer intend to pay cash dividends on our common stock. We currently intend to retain future earnings to finance the growth of our business. 13 CAPITALIZATION The following table sets forth: -- our actual consolidated capitalization as of December 28, 2001, and -- our consolidated capitalization on an adjusted basis to reflect the sale of 5,600,000 shares of our common stock in the offering at an estimated public offering price of $21.30 per share, based on the reported last sale price of our common stock on February 26, 2002, and the application of the estimated net proceeds as described under the heading "Use of Proceeds." You should read this table in conjunction with our consolidated financial statements and the notes thereto and the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" section included elsewhere in this prospectus.
DECEMBER 28, 2001 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (DOLLARS IN THOUSANDS) Cash and cash equivalents................................... $142,267 $205,133 ======== ======== Short-term debt: Current installments of long-term debt.................... $ 122 $ 122 Long-term debt: Revolving credit facilities............................... 75,000 25,000 Term loans................................................ 13,557 13,557 Mortgage notes (less current installments)................ 450 450 -------- -------- Total long-term debt (less current installments)....... 89,007 39,007 Shareholders equity: Common stock, par value $.125, 175,000,000 shares authorized, 33,683,420 shares issued and outstanding (actual), 39,283,420 shares issued and outstanding (as adjusted).............................................. 4,210 4,910 Additional paid-in capital................................ 65,974 178,140 Retained earnings......................................... 264,055 264,055 Other..................................................... (5,008) (5,008) -------- -------- Total shareholders' equity............................. 329,231 442,097 -------- -------- Total capitalization................................... $418,360 $481,226 ======== ========
The above table excludes, as of December 28, 2001: -- 2,829,462 shares of common stock reserved for issuance under our incentive compensation plan, of which 223,400 shares were subject to outstanding options, with a weighted average exercise price of $21.60 per share, -- 1,000,000 shares of common stock reserved for issuance under our employee stock purchase plan, and -- 40,432 shares of common stock reserved for issuance under our board of directors stock plan. 14 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth our selected financial data for the five fiscal years ended December 28, 2001. The selected consolidated financial data for the five fiscal years ended December 28, 2001 are derived from our audited consolidated financial statements. The consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and the notes thereto and the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" section included elsewhere in this prospectus.
YEARS ENDED ---------------------------------------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 29, DEC. 28, 1997(1) 1998 1999 2000 2001 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF EARNINGS DATA: Net sales................................................... $397,067 $448,539 $530,436 $664,378 $474,199 Cost of sales............................................... 269,050 306,296 358,553 409,856 359,681 -------- -------- -------- -------- -------- Gross profit.............................................. 128,017 142,243 171,883 254,522 114,518 Selling, general and administrative expenses................ 82,264 88,827 110,694 131,113 98,837 Restructuring and unusual and infrequent items.............. -- -- -- 3,305 13,594 -------- -------- -------- -------- -------- Operating profit.......................................... 45,753 53,416 61,189 120,104 2,087 Interest and other income, net.............................. (1,011) 1,073 2,180 (2,810) (3,282) -------- -------- -------- -------- -------- Earnings before income taxes.............................. 46,764 52,343 59,009 122,914 5,369 Income tax expense........................................ 17,678 19,034 14,697 23,606 2,903 -------- -------- -------- -------- -------- Net earnings.............................................. $ 29,086 $ 33,309 $ 44,312 $ 99,308 $ 2,466 ======== ======== ======== ======== ======== Earnings per share: Basic(2).................................................. $ 0.90 $ 1.04 $ 1.38 $ 3.05 $ 0.07 Diluted(2)................................................ $ 0.90 $ 1.03 $ 1.36 $ 3.02 $ 0.07 Weighted average shares outstanding (basic)................. 32,186 31,962 32,092 32,510 33,202 Weighted average shares outstanding (diluted)............... 32,274 32,406 32,492 32,859 33,566 BALANCE SHEET DATA: Total assets................................................ $255,334 $344,134 $381,239 $520,771 $525,020 Total long-term debt (including current installments)....... 32,957 60,898 60,496 48,588 89,129 Shareholders' equity........................................ 142,375 174,809 215,635 324,430 329,129 Working capital(3).......................................... 87,618 102,336 141,851 230,397 189,257 Cash and cash equivalents................................... 48,803 13,563 88,161 162,631 142,267 OTHER DATA: Net cash provided by/(used in): Operating activities...................................... $ 23,734 $ 49,727 $ 69,252 $113,788 $ 62,686 Investing activities...................................... (6,931) (62,834) (32,928) (34,770) (124,151) Financing activities...................................... 9,387 14,928 1,356 (4,796) 41,071 Capital expenditures, exclusive of acquisitions............. 13,447 20,398 18,766 29,976 13,149 Depreciation and amortization............................... 12,863 16,280 19,411 22,378 26,553 EBITDA(4)................................................... 58,616 69,696 80,600 142,482 28,640 Research, development and engineering expenses.............. 16,438 16,840 19,611 20,178 20,210 Dividends declared per share(2)(5).......................... $ 0.11 $ 0.12 $ 0.13 $ 0.14 $ 0.14
- ------------ (1) Amounts reflect continuing operations after disposition of the businesses comprising our Test and Measurement Segment which was divested on June 4, 1997 for approximately $34.0 million. (2) Per share amounts reflect two-for-one stock splits on November 27, 2000 and February 28, 1997. (3) Includes cash and cash equivalents and current installments of long-term debt. (4)EBITDA (earnings before interest, taxes, depreciation and amortization) is operating profit plus depreciation and amortization. EBITDA is not a measure of performance under accounting principles generally accepted in the United States. EBITDA should not be considered a substitute for, and an investor should also consider, cash flow from operations, net income and other measures of performance as defined by accounting principles generally accepted in the United States as an indicator of our profitability or liquidity. EBITDA is often used by shareholders and analysts as an indicator of a company's ability to service debt and fund capital expenditures. We believe it enhances a reader's understanding of our financial condition, results of operations and cash flow because it is unaffected by capital structure and therefore, enables investors to compare our operating performance to other companies. We understand that our presentation of EBITDA may not be comparable to other similarly titled captions of other companies due to differences in the method of calculation. (5) After January 25, 2002, we no longer intend to pay cash dividends on our common stock. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis of our financial condition and results of operations contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described in "Risk Factors" and elsewhere in and incorporated by reference in this prospectus. OVERVIEW Technitrol is a global producer of precision-engineered passive magnetics-based electronic components and electrical contact products and materials. We believe we are a leading global producer of these products and materials in the primary markets we serve. We operate our business in two distinct segments: -- the electronic components segment, which operates under the name Pulse, and -- the electrical contact products segment, which operates under the name AMI Doduco. General. We experienced consistent growth in net sales from fiscal 1991 through fiscal 2000. We define net sales as gross sales less returns and allowances. We sometimes refer to net sales as revenue. During the past several years, the growth in our consolidated net sales has been due in large part to the growth of Pulse. However, since early 2001, the electronic markets served by Pulse have experienced a severe global contraction. While we currently do not have a great deal of visibility with respect to future demand for our products, particularly at Pulse, we believe that the markets we serve have begun to stabilize and that a market rebound will be gradual. Historically, the gross margin at Pulse has been significantly higher than at AMI Doduco. As a result, the mix of net sales generated by Pulse and AMI Doduco during a period affects our consolidated gross margin. For example, our gross margin for the year ended December 28, 2001 was 24.1% compared to 38.3% for the year ended December 29, 2000. During the year ended December 28, 2001, Pulse generated approximately 53.4% of our consolidated net sales compared to approximately 66.0% in the year ended December 29, 2000. Our gross margin is also significantly affected by capacity utilization, particularly at AMI Doduco. Pulse has a relatively short-term product life cycle. As a result, significant product turnover occurs each year. Therefore, Pulse's changes in average selling prices do not necessarily provide a meaningful and quantifiable measure of Pulse's operations. AMI Doduco has a fairly long-term and mature product line, without significant turnover. There is minimal variation in the prices of product sold. Therefore, changes in prices do not have a material impact on AMI Doduco revenue. Accordingly, substantially all of the sales growth and contraction at AMI Doduco is attributable to changes in unit volume. Acquisitions. Historically, acquisitions have been an important part of our growth strategy. In many cases, our move into new and high-growth extensions of our existing product lines or markets has been facilitated by an acquisition. Our acquisitions continually change the mix of our net sales. Pulse made numerous acquisitions in recent years which have increased its penetration into its primary markets and expanded its presence in new markets. Recent examples of these acquisitions include Excelsus, Grupo ECM and EWC. Excelsus was acquired in August 2001 for approximately $85.9 million, net of cash acquired. Excelsus is based in Carlsbad, California and is a leading North American producer of customer-premises digital subscriber line filters and other broadband accessories. Pulse acquired Electro Componentes Mexicana, which we refer to as Grupo ECM, in March 2001. Grupo ECM is a manufacturer of inductive components primarily for automotive applications. In October 2000, Pulse acquired various assets of EWC, a manufacturer of magnetic components primarily for the defense and aerospace industries. Similarly, AMI Doduco has made a number of recent acquisitions. In January 2001, AMI Doduco acquired the electrical contact and materials business of Engelhard-CLAL, a manufacturer of electrical contacts, wire and strip contact materials and related products. In addition, in fiscal 2000, AMI Doduco acquired a tool and mold fabrication facility in Estonia and in fiscal 1999 it acquired MEC Betras Italia, a producer of electrical contact rivets and stamped electrical contact parts, located near Milan, Italy. These 16 acquisitions were driven by our strategy of expanding our product and geographical market presence for electrical contact products. Due to our quick integration of acquisitions and the interchangeable sources of net sales between existing and acquired operations, we do not separately track the net sales of an acquisition after the date of the transaction. Recent Cost Reduction Programs. During 1999 and 2000, the electronic components industry served by Pulse was characterized by unprecedented growth. Beginning in late 2000 and continuing all during 2001, however, the opposite trend was experienced as these industries experienced a severe worldwide contraction and many of our customers canceled orders and decreased their level of business activity as a result of lower demand for their end products. While the electrical contact industry served by AMI Doduco is generally less dependent on volatile technology markets, it too was negatively impacted by general economic trends as reflected in slower housing starts, capital spending and automotive sales both in the United States and western Europe. Our manufacturing business model at Pulse has a very high variable cost component due to the labor-intensity of many processes. This allows us to quickly change our capacity based on market demand. Just as we expanded capacity during 1999 and 2000, we reduced capacity during 2001. We implemented restructuring initiatives during 2001 in order to further reduce Pulse's cost structure and capacity, although the speed and depth of the contraction in Pulse's markets made it impossible to reduce costs at the same rate at which revenues contracted throughout 2001. During the second quarter of 2001, we announced the closure of our production facility in Thailand and during the third quarter, we announced the closure of our production facility in Malaysia. The production at these two facilities was transferred to other Pulse facilities in Asia. We provided reserves of $3.6 million for these plant closings, comprised of $2.5 million for severance and related payments and $1.1 million for other exit costs. The majority of this accrual will be utilized by the end of the first quarter of 2002. We also adopted other restructuring plans during 2001. In this regard, provisions of $6.4 million were recorded during 2001. Approximately 3,500 manufacturing personnel primarily in Asia, and approximately 200 support personnel in North America and Europe were terminated. Approximately 75% of all of the employee severance and related payments in connection with these actions were completed as of December 28, 2001. Approximately $2.3 million of the provision remains as of December 28, 2001 for severance payments and related expenses to be made during 2002. An additional $0.7 million remains accrued at December 28, 2001 for other exit costs primarily in Thailand and Malaysia. Termination costs for employees at our Thailand and Malaysian facilities have been included in the separate provisions for exiting those facilities. In addition to these terminations, headcount was reduced by approximately 12,300 additional personnel, net of new hires, during fiscal 2001 through voluntary employee attrition and involuntary workforce reductions, primarily at manufacturing facilities in the PRC where severance payments are not necessary. Accordingly, on a consolidated basis, our employee base dropped from approximately 30,600 as of December 29, 2000 to approximately 14,800 as of December 28, 2001. We recorded pre-tax inventory provisions in cost of sales of $20.3 million for the year ended December 28, 2001. The provisions were recorded throughout each quarter of 2001, although the fourth quarter had the most significant impact. The amounts were determined by comparing quantity on-hand to actual historical usage and forecasted demand for 2002. The inventory that was fully reserved in 2001 was primarily raw materials and specific finished goods for several customers. In addition, a charge of $3.5 million was recorded during the third quarter of 2001 to write down the value of certain Pulse fixed assets to their disposal value. These assets include Asian-based production equipment that became idle in 2001 due to the contraction of Pulse's business. The assets have been marketed through the liquidation market, and the majority have either been sold for their residual value or scrapped. The remaining cost basis of the assets has been reclassified from fixed assets to assets held for sale in the balance sheet as of December 28, 2001. Additional inventory and fixed asset write-downs are expected if demand for electronic components decreases in the future. Total restructuring and unusual and infrequent items for the year ended December 31, 2001 includes $3.6 million related to the Thailand and Malaysia plant closings, $6.4 million for other restructuring plans and $3.5 million for the write down of Pulse fixed assets. Approximately $0.5 million for AMI Doduco restructuring actions is included in the aggregate charge of $6.4 million noted above. The capital-intensity of AMI Doduco makes quick changes in its cost structure more 17 challenging than at Pulse. In the quarter ended March 31, 2000, AMI Doduco recorded a $5.5 million provision for restructuring initiatives due to a reduction in employment levels by approximately 120 people, primarily in Germany. In addition, the AMI Doduco restructuring initiative provided for the relocation of high-volume, repetitive production to lower-cost locations, worldwide continuous process improvement efforts, and the expansion of our more profitable and automated business based in Germany. As a result of the program, we provided $3.7 million for employee severance and related payments, $0.9 million related to the impairment of certain assets and $0.9 million for other exit costs. Offsetting these costs was a gain of $1.4 million related to the sale of a non-strategic European product line and a $0.8 million gain related to an insurance settlement. As a result of our core business focus on both economic and operating profit, we will continue to aggressively size both Pulse and AMI Doduco so that costs are minimized during market downturn, while we plan for the recovery in demand and pursue additional growth opportunities. We may adopt additional cost reduction actions during 2002, depending on the timing and extent of a recovery in Pulse's markets and the economy in general. If additional actions are undertaken, the amounts will depend on specific actions taken to reduce manufacturing capacity and improve efficiency. Our restructuring charges are summarized on a year-to-date basis for 2001 as follows:
AMI Doduco Pulse Total Restructuring provision (in millions): ------ ----- ----- Balance accrued at December 29, 2000............... $ 2.5 $ -- $ 2.5 Accrued during the year ended December 28, 2001.... 0.5 13.1 13.6 Severance and other cash payments.................. (2.2) (7.2) (9.4) Non-cash asset disposals........................... (0.2) (3.5) (3.7) ----- ----- ----- Balance accrued at December 28, 2001............... $ 0.6 $ 2.4 $ 3.0 ===== ===== =====
International Operations. An increasing percentage of our sales in recent years has been outside of the U.S. As of December 28, 2001, we have operations in 12 countries and we have significant net sales in currencies other than the U.S. dollar. For the year ended December 28, 2001, 64.9% of our net sales were outside of the U.S. For the year ended December 29, 2000, 55.5% of our net sales were outside of the U.S. As a result, changing exchange rates often impact our financial results and the analysis of our period-over-period results. This is particularly true of movements in the exchange rate between the U.S. dollar and the euro. AMI Doduco's European sales are denominated primarily in euros. A portion of Pulse's European sales are also denominated in euros. However, the proportion at Pulse is much less than it is at AMI Doduco. As a result of this and other factors, Pulse uses the U.S. dollar as its functional currency in Europe while AMI Doduco uses the euro. The use of different functional currencies creates different financial effects. The euro was 3.3% weaker, on average, relative to the U.S. dollar during the year ended December 28, 2001 than in the comparable prior-year period. As a result, AMI Doduco's euro-denominated sales resulted in lower dollar sales upon translation for our U.S. consolidated financial statements. We also experienced a negative translation adjustment to equity in the 2001 period because our investment in AMI Doduco's European operations was worth less in U.S. dollars. At Pulse, we incurred foreign currency losses as euro denominated assets and liabilities were remeasured to U.S. dollars for financial reporting purposes during 2001. If an increasing percentage of our sales are denominated in non-U.S. currencies, it could increase our exposure to currency fluctuations. The impact of exchange rate differences on AMI Doduco's European sales will be partially offset by the impact on its expenses and bank borrowings in Europe, most of which are also denominated in euros. Despite Pulse's significant presence in Asia, the vast majority of its revenues from customers in Asia are denominated in U.S. dollars. As a result, Pulse has less exposure than AMI Doduco to sales fluctuations caused by currency fluctuations. In order to reduce our exposure resulting from currency fluctuations, we may purchase currency exchange forward contracts and/or currency options. These contracts guarantee a predetermined range of exchange rates at the time the contract is purchased. This allows us to shift the majority of the risk of currency fluctuations from the date of the contract to a third party for a fee. As of December 28, 2001, we had five foreign currency forward contracts outstanding in order to sell forward approximately 44.2 million of euro in order to hedge intercompany loans. In determining the use of forward exchange contracts and currency options, we consider the amount of sales, purchases and net assets or liabilities denominated in local currencies, the type of currency, and the costs associated with the contracts. 18 Precious Metals. AMI Doduco uses silver, as well as other precious metals, in manufacturing some of its electrical contacts, contact materials and contact subassemblies. Historically, we have leased or held these materials through consignment arrangements with our suppliers. Leasing and consignment costs have been substantially below the costs to borrow funds to purchase the metals and these arrangements eliminate the fluctuations in the market price of owned precious metal. AMI Doduco's terms of sale generally allow us to charge customers for the market value of silver on the day after we deliver the silver bearing product to the customer. Thus far we have been successful in managing the costs associated with our precious metals. While limited amounts are purchased for use in production, the majority of our precious metal inventory continues to be leased or held on consignment. If our leasing/consignment fees increase significantly in a short period of time, and we are unable to recover these increased costs through higher sale prices, a negative impact on our results of operations and liquidity may result. Leasing/consignment fee increases are caused by increases in interest rates or increases in the market price of the consigned material. Income Taxes. Our effective income tax rate is affected by the proportion of our income earned in high-tax jurisdictions such as Germany and the income earned in low-tax jurisdictions, particularly in Asia. This mix of income can vary significantly from one period to another. We have benefited over recent years from favorable offshore tax treatments. However, we may not be able to take advantage of similar benefits in the future. Developing countries and, in particular, the People's Republic of China, may change their tax policies at any time. During the first quarter of fiscal 1999, we initiated a number of actions aimed at ensuring that our overall tax rate is optimal and appropriate. These actions followed a comprehensive global review of our business operations and tax planning opportunities. The effect of these actions was a reduction in our effective tax rate. We have not provided for U.S. federal income and foreign withholding taxes on approximately $294.0 million of our non-U.S. subsidiaries' undistributed earnings (as calculated for income tax purposes) as of December 28, 2001. Such earnings include pre-acquisition earnings of foreign entities acquired through stock purchases, and are intended to be reinvested outside of the U.S. indefinitely. It is not practical to estimate the amount of unrecognized deferred taxes on these undistributed earnings. Where excess cash has accumulated in our non-U.S. subsidiaries and it is advantageous for tax reasons, subsidiary earnings may be remitted. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 28, 2001 COMPARED TO THE YEAR ENDED DECEMBER 29, 2000 Net Sales. Net sales for the year ended December 28, 2001 decreased $190.2 million, or 28.6%, to $474.2 million from $664.4 million in the year ended December 29, 2000. Our sales decline from the comparable period last year was attributable primarily to the precipitous global downturn in markets served by Pulse that began late in 2000. Factors contributing to the downturn included declining capital expenditures by end-users and subsequent excess inventory levels. This downturn was experienced in Pulse's networking, telecommunications and power conversion markets on a worldwide basis, particularly in North America and Europe. Pulse's net sales decreased $185.5 million, or 42.3%, to $253.3 million for the year ended December 28, 2001 from $438.8 million in the year ended December 29, 2000. Pulse's sales were significantly lower in 2001 than in 2000 as new order rates declined and significant customer order cancellations occurred. Net sales in 2001 include sales derived from our acquisitions of Grupo ECM and Excelsus since the date of their acquisition in March and August 2001, respectively. AMI Doduco's net sales decreased $4.7 million, or 2.1%, to $220.9 million for the year ended December 28, 2001 from $225.6 million in the year ended December 29, 2000. Sales in the 2001 period reflect strong European markets and contributions from the Engelhard-CLAL operations, acquired in early January 2001. However, these positive factors were offset by a slowdown in North American manufacturing activity during the year ended December 28, 2001, and to a lesser extent, a decline in the average euro-to-U.S. dollar exchange rate. The lower manufacturing activity resulted in lower net sales primarily from customers in the commercial and industrial machinery, telecommunications and appliance industries. Cost of Sales. Our cost of sales decreased $50.2 million, or 12.2%, to $359.7 million for the year ended December 28, 2001 from $409.9 million for the year ended December 29, 2000. This decrease was due to a decrease in net sales. Our consolidated gross margin for the year ended December 28, 2001 was 24.1% 19 compared to 38.3% for the year ended December 29, 2000. Since the Pulse gross profit as a percentage of sales is typically higher than that of AMI Doduco, our consolidated gross margin in 2001 was negatively affected by: -- a mix of net sales weighted more heavily by AMI Doduco on a relative basis, -- manufacturing inefficiencies at both Pulse and AMI Doduco due to under-utilization of capacity as a result of the market downturn, and -- provisions for slow moving inventory at Pulse due to the business slowdown. These factors more than offset the positive impact of our restructuring initiatives. Selling, General and Administrative Expenses. Total selling, general and administrative expenses for the year ended December 28, 2001 decreased $32.3 million, or 24.6%, to $98.8 million, or 20.8% of net sales, from $131.1 million, or 19.7% of sales, in the year ended December 29, 2000. The decrease in selling, general and administrative expenses in 2001 was due to aggressive action that we took to reduce costs and tighten spending controls. For example, selling expenses, which are largely variable with net sales, decreased $3.1 million from 2000 to 2001. Administrative expenses decreased by $30.2 million, due largely to reduced headcount and lower incentive awards and lower expenses related to our restricted stock plan in 2001. These decreases were partially offset by higher research, development and engineering expenses, which increased by $1.0 million from 2001. The underlying expense for incentive awards is primarily variable and dependent upon our overall financial performance regarding incentive plan targets, primarily the achievement of economic profit and net operating profit objectives. These targets, which were set in December of 2000, were not achieved, and consequently, except for a small payment by AMI Doduco in the first quarter of 2001, no cash incentives were paid to executives. These incentive awards were $0.5 million in 2001 compared to $9.4 million in 2000. Expenses associated with stock-based compensation plans including the restricted stock plan were also significantly lower in 2001 versus the year ended December 29, 2000, due to a lower average share price of our common stock throughout 2001 compared to 2000. These expenses were approximately $1.2 million in 2001 compared to $7.0 million in 2000. Research, development and engineering expenses are included in selling, general and administrative expenses. We refer to research, development and engineering expenses as RD&E. For the years ended December 28, 2001 and December 29, 2000, RD&E by segment was as follows (dollars in thousands):
2001 2000 ------- ------- Pulse.................................................... $16,026 $15,748 Percentage of segment sales.............................. 6.3% 3.6% AMI Doduco............................................... $ 4,155 $ 4,430 Percentage of segment sales.............................. 1.9% 2.0%
Although 2001 has been characterized by cost reduction activities and much lower sales levels, particularly at Pulse, we have largely avoided spending cuts in the RD&E area as we believe that the recovery in the electronic components markets will be driven by next-generation products. Design and development activities with our OEM customers have continued at an aggressive pace during 2001. Interest. Net interest income was $1.4 million for the year ended December 28, 2001 compared to $2.9 million for the year ended December 29, 2000. Invested cash balances remained essentially consistent with the year ended December 29, 2000, due to the intense focus on cash management throughout 2001. This resulted in preservation of average cash balances throughout 2001. Outstanding debt increased during the year ended December 28, 2001 due primarily to $74.0 million that was incurred in connection with the acquisition of Excelsus in August 2001, resulting in increased interest expense. Our new credit facility, which was entered into on June 20, 2001, has variable interest rates. Accordingly, interest expense may increase if the rates associated with, or the amounts borrowed under, our credit facilities move higher during subsequent quarters. We may use interest rate swaps or other financial derivatives in order to manage the risk associated with changes in market interest rates; however, we have not used any such instruments to date. Income Taxes. The effective income tax rate for the year ended December 28, 2001 was 54.1% compared to 19.2% in the year ended December 29, 2000. The higher tax rate in 2001 resulted from the non-deductibility 20 of certain restructuring charges incurred in 2001. Specifically, plant shut-down costs and severance expenses were incurred in low-tax jurisdictions or countries where we have current losses or where we will not have operations in the future. Thus, we expect to have no future income to offset such charges, resulting in little or no income tax benefit. In addition, a higher proportion of income was earned in high-tax jurisdictions. YEAR ENDED DECEMBER 29, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 Net Sales. Net sales in the year ended December 29, 2000 increased $133.9 million, or 25.3%, to $664.4 million from $530.4 million in the year ended December 31, 1999. This increase was attributable to: -- a strong demand cycle throughout 2000 in Pulse markets for data networking, telecommunications and power conversion, and -- continued new product development by our customers and our related record number of new product design wins. Pulse's net sales increased $131.4 million, or 42.8%, to $438.8 million in the year ended December 29, 2000 from $307.4 million in the year ended December 31, 1999. This sales growth was not impacted by acquisitions and was due to unprecedented market growth across all of our primary product areas. AMI Doduco's net sales increased $2.5 million, or 1.1%, to $225.6 million in the year ended December 29, 2000 from $223.1 million in the year ended December 31, 1999. This increase was due to strong market growth in our primary product areas. Despite the increase, AMI Doduco's net sales in the year ended December 29, 2000 were negatively affected by: -- an average euro-to-U.S. dollar exchange rate that was 6.5% below the 1999 average, and -- our sale of a non-strategic European product line. Partially offsetting these negative sales factors was the full year of operating contributions by our acquisition of MEC Betras made in December 1999. Cost of Sales. Our cost of sales increased $51.3 million, or 14.3%, to $409.9 million in the year ended December 29, 2000 from $358.6 million in the year ended December 31, 1999. The increase resulted from higher net sales in the year ended December 29, 2000. Our consolidated gross margin for the year ended December 29, 2000 was 38.3% compared to 32.4% in the year ended December 31, 1999. Pulse's gross margin increased from the prior year as a result of volume efficiencies, a favorable sales mix and the full year effect of cost control programs that were instituted in the first quarter of the year ended December 31, 1999. AMI Doduco's gross margin increased slightly from the prior year due to our cost reduction efforts. Product mix was an offsetting factor, due to a higher content of precious metals, on which we realize low margins, in the year ended December 29, 2000 compared with the year ended December 31, 1999. Selling, General and Administrative Expenses. Total selling, general and administrative expenses for the year ended December 29, 2000 increased $20.4 million, or 18.4%, to $131.1 million, or 19.7% of net sales, from $110.7 million, or 20.9% of net sales, in the year ended December 31, 1999. The increase in absolute dollars was due primarily to the following reasons: -- compensation expense associated with cash performance incentive plans, which are linked to operating profits, economic profit and earnings per share targets was $4.3 million higher in the year ended December 29, 2000 compared to the year ended December 31, 1999; -- stock compensation plan expense, which is variable in relation to our quoted share price, was $4.1 million higher in the year ended December 29, 2000 compared to the year ended December 31, 1999; -- higher spending was required to support the higher level of Pulse sales, including increases of $1.5 million related to selling expenses such as commissions and other expenses that largely vary with sales; -- administrative expenses, including the stock and incentive compensation-related items noted above, increased $18.9 million; 21 -- expenses related to acquisition development and integration activity, such as travel and consulting, were higher in the year ended December 29, 2000 compared to the year ended December 31, 1999. Increases noted above are shown net of the effect of our expense reduction programs, particularly the reduction in employment levels by approximately 120 people. The annual salary and benefit costs associated with these people was approximately $4.8 million. For the year ended December 29, 2000 and December 31, 1999, RD&E by segment was as follows (dollars in thousands):
2000 1999 ------- ------- Pulse.................................................... $15,748 $13,972 Percentage of segment sales.............................. 3.6% 4.6% AMI Doduco............................................... $ 4,430 $ 5,639 Percentage of segment sales.............................. 2.0% 2.5%
RD&E spending within Pulse increased from the year ended December 31, 1999 in absolute dollars as Pulse continued to invest in new technologies and related improvements to respond to rapid technology changes in its marketplace. As a percentage of sales, Pulse spending in the year ended December 29, 2000 was less than the year ended December 31, 1999 as Pulse's sales reached record levels in the year ended December 29, 2000. RD&E spending within AMI Doduco decreased from the year ended December 31, 1999 due to the disproportionate share of RD&E required by the non-strategic European product line that was divested in the first quarter of fiscal 2000. Interest. Interest income for the year ended December 29, 2000 was $6.3 million compared with $1.9 million in the year ended December 31, 1999. Cash and cash equivalents were substantially higher during year ended December 29, 2000 than during the year ended December 31, 1999, and the average percentage of yield was also higher throughout the year ended December 29, 2000. Our higher level of interest income in year ended December 29, 2000 over year ended December 31, 1999 was also due to the majority of the increase in cash in the year ended December 29, 1999 being generated during the latter part of 1999. For the year ended December 29, 2000, interest expense was $3.5 million, essentially the same as in the year ended December 31, 1999. Income Taxes. Our effective income tax rate during fiscal 2000 was 19.2%. This compares to 24.9% in the year ended December 31, 1999. For the year ended December 29, 2000, a higher proportion of income was earned in low-tax jurisdictions by Pulse. LIQUIDITY AND CAPITAL RESOURCES Working capital as of December 28, 2001 was $189.3 million compared to $230.4 million as of December 29, 2000. This decrease was primarily due to lower accounts receivable and inventory levels during 2001. Cash and cash equivalents, which is included in working capital, decreased from $162.6 million as of December 29, 2000 to $142.3 million as of December 28, 2001. Net cash from operating activities was $62.7 million for the year ended December 28, 2001 and $113.8 million in 2000, a decrease of $51.1 million. In 2000, our cash flow from operations was primarily driven by increasing net earnings. During the year ended December 28, 2001, net earnings declined as a result of the dramatic slowdown in the markets served by Pulse. However, the lower earnings have been partially offset by decreased working capital requirements and aggressive cash management actions that we took in response to the slowdown. A significant decrease in Pulse's net sales during the year ended December 28, 2001 caused a significant decrease in accounts receivable. The decrease in accounts payable and accrued expenses resulted from payments made for income taxes and compensation related items, as well as a lower level of trade accounts payable due to reduced production. Net of the effect of acquisitions, inventory declined by $28.7 million during the year ended December 28, 2001 due to the significant reduction in Pulse's net sales during the period and corresponding actions to limit purchases and production activity. The reduction in 22 inventory also reflects $13.1 million of provisions for excess inventory during the year ended December 28, 2001. Capital expenditures were $13.2 million during the year ended December 28, 2001 and $30.0 million in 2000. The level of capital expenditures decreased from the comparable period in 2000, due to tight spending controls and lower Pulse capacity needs resulting from lower sales. During the year ended December 28, 2001, capital spending was $6.0 million in the first quarter, $2.7 million in the second quarter, $1.8 million in the third quarter and $2.7 million in the fourth quarter, as our efforts to maximize cash flow during this period of slow market activity intensified. We significantly reduced our capital spending in 2001 as compared to fiscal 2000 and expect that our spending in 2002 may be less than in 2001. We make capital expenditures to expand production capacity and to improve our operating efficiency. We plan to continue making such expenditures in the future. Cash used for acquisitions was $120.3 million for the year ended December 28, 2001 and $5.4 million in the comparable period of 2000. The 2001 spending includes the August 2001 acquisition of Excelsus for approximately $90.7 million, including cash acquired of $4.8 million. We may acquire other businesses or product lines to expand our breadth and scope of operations. We paid dividends of $4.5 million in the year ended December 28, 2001 and $4.4 million in the year ended December 29, 2000. We received proceeds of $6.5 million during the year ended December 28, 2001 and $8.4 million in the year ended December 29, 2000 from the sale of stock through our employee stock purchase plan. We do not expect to continue receiving significant proceeds through our employee stock purchase plan in the near term. After paying a dividend on January 25, 2002 to shareholders of record on January 4, 2002, we no longer intend to pay cash dividends on our common stock. We currently intend to retain future earnings to finance the growth of our business. All previous credit facilities and lines of credit, excluding fixed term loans, were replaced as of June 20, 2001 under a new three-year revolving credit agreement providing for $225.0 million of credit capacity. The credit facility consists of: -- a U.S. dollar-based revolving line of credit in the principal amount of up to $225.0 million; -- a British pounds sterling-based or euro-based revolving line of credit in the principal amount of up to the U.S. dollar equivalent of $100.0 million; and -- a multicurrency facility providing for the issuance of letters of credit in an aggregate amount not to exceed the U.S. dollar equivalent of $10.0 million. The amounts outstanding under the credit facility in total may not exceed $225.0 million. We pay a facility fee irrespective of whether there are outstanding borrowings or not, which ranges from 0.275% to 0.450% of the total commitment, depending on our ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA). The interest rate for each currency's borrowing will be a combination of the base rate for that currency plus a credit margin spread. The base rate is different for each currency: LIBOR or prime rate for U.S. dollars, Euro-LIBOR for euros, and a rate approximating sterling LIBOR for British pounds. The credit margin spread is the same for each currency and is 0.850% to 1.425% depending on our debt to EBITDA ratio. Each of our domestic subsidiaries with net worth equal to or greater than $5 million has agreed to guarantee all obligations incurred under the credit facility. The credit facility also contains covenants requiring maintenance of minimum net worth, maximum debt to EBITDA ratio, minimum interest expense coverage, capital expenditure limitations and other customary and normal provisions. We are in compliance with all of these covenants. Our German indirect subsidiary, AMI Doduco GmbH, has obligations outstanding under two term loan agreements. The first is with Baden-Wurttembergische Bank for the borrowing of two loans, each in the amount of 10 million Deutsche marks, both due in June 2003. The second is with Sparkasse Pforzheim, for the borrowing of 10 million Deutsche marks, and is due in August 2009. We and several of our subsidiaries have guaranteed the obligations arising under these term loan agreements. 23 We believe that the combination of cash on hand, cash generated by operations and, if necessary, additional borrowings under our credit agreement will be sufficient to satisfy our operating cash requirements in the short-term and long-term. In addition, we may use internally generated funds or borrowings, or additional equity offerings for acquisitions of suitable businesses or assets. With the exception of approximately $10.0 million of retained earnings as of December 28, 2001 in the PRC that are restricted in accordance with Section 58 of the PRC Foreign Investment Enterprises Law, substantially all retained earnings are free from legal or contractual restrictions. The amount restricted in accordance with the PRC Foreign Investment Enterprise Law is for employee welfare programs and is applicable to all foreign investment enterprises doing business in the PRC. The restriction applies to 10% of our net earnings in the PRC, limited to 50% of the total capital invested in the PRC. We have not experienced any significant liquidity restrictions in any country in which we operate and none are foreseen. However, foreign exchange ceilings imposed by local governments and the sometimes lengthy approval processes which some foreign governments require for international cash transfers may delay our internal cash movements from time to time. The retained earnings in other countries represent a material portion of our assets. We expect to reinvest these earnings outside of the United States because we anticipate that a significant portion of our opportunities for growth in the coming years will be abroad. If these earnings were brought back to the United States, significant tax liabilities could be incurred in the United States as several countries in which we operate have rates significantly lower than the U.S. statutory rate. Additionally, we have not accrued U.S. income taxes on foreign earnings indefinitely invested abroad. We have also been granted special tax incentives in other countries such as the PRC and the Philippines. This favorable situation could change if these countries were to increase rates or revoke the special tax incentives, or if we were to discontinue manufacturing operations in these countries. This could have a material unfavorable impact on our net income and cash position. We commenced an inter-segment lending program during the year ended December 28, 2001, whereby excess U.S. dollar denominated cash is being used to retire euro denominated debt. The benefit derived from this program is lower net interest expense, as the U.S. dollar interest income rates have been decreasing, while the euro interest expense rates have declined less rapidly. At December 28, 2001, we had approximately $150.0 million of unused line credit available under the credit agreement, although outstanding borrowings are limited to a maximum multiple of three times EBITDA on a rolling twelve-month basis. NEW ACCOUNTING PRONOUNCEMENTS In October 2001, the Financial Accounting Standards Board, or FASB, issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of SFAS 121. SFAS 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 144 does however, retain the requirement in APB 30 to report separately discontinued operations, and extends this reporting requirement to a component of an entity that either has been disposed of by sale, abandonment, or in a distribution to owners; or is classified as held for sale. Goodwill is excluded from the scope of SFAS 144. We are required to adopt the provisions of SFAS 144 for the three months ending March 29, 2002. Adoption of this standard is not expected to have a material effect on our net sales, operating results or liquidity. In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS143 applies to legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and (or) normal use of the assets. SFAS 143 requires that the fair value of a liability for an asset retirement 24 obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, a gain or loss on settlement will be recognized. We are required to adopt the provisions of SFAS 143 during the three months ending March 28, 2003. Adoption of this standard is not expected to have a material effect on our net sales, operating results or liquidity. In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001. SFAS 141 also specifies that intangible assets acquired in a purchase method business combination must meet certain criteria to be recognized and reported apart from goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead they are tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 144. We are adopting the provisions of SFAS 141 immediately, and SFAS 142 effective January 1, 2002. Furthermore, any goodwill and any intangible assets determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001 are not amortized, but will continue to be evaluated for permanent impairment. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 were amortized until December 28, 2001. Since our acquisition of Excelsus was completed on August 7, 2001, the provisions of SFAS 141 were applied. Therefore, goodwill and certain intangibles with indefinite lives resulting from the Excelsus transaction have not been subject to amortization. In connection with the transitional goodwill impairment evaluation, SFAS 142 requires us to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, we must determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. We then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and we must perform the second step of the transitional impairment test. In the second step, we must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets and liabilities in a manner similar to a purchase price allocation in accordance with SFAS 141, to its carrying amount. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in our statement of earnings. We had approximately $80.3 million of unamortized goodwill and $48.2 million of other intangible assets as of December 28, 2001, which will be subject to the transition provisions of SFAS 141 and SFAS 142. Amortization expense was approximately $5.4 million and $3.8 million for the years ended December 28, 2001 and December 29, 2000, respectively. We are performing the transitional impairment test and currently estimate that an impairment loss of approximately $16.0 million to $19.0 million will be recorded in the first quarter of 2002. This loss will be recognized as a cumulative effect of an accounting principle change. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK Our financial instruments, including cash and cash equivalents and long-term debt, are exposed to changes in interest rates in both the U.S. and abroad. We invest our excess cash in short-term, investment grade interest bearing securities. We generally limit our exposure to any one financial institution to the extent practical. Our board has adopted policies relating to these risks, and the audit committee of the board continually monitors compliance with these policies. 25 Our existing credit facility has variable interest rates. Accordingly, interest expense may increase if the rates associated with, or the amount of, our borrowings move higher. In addition, we may pursue additional or alternative financing for growth opportunities in one or both segments. We may use interest rate swaps or other financial derivatives in order to manage the risk associated with changes in market interest rates. However, we have not used any of these instruments to date. The table below presents principal amounts in U.S. dollars (or equivalent U.S. dollars with respect to non-U.S. denominated debt) and related weighted average interest rates by year of maturity for our debt obligations. The column captioned "Approximate Fair Value" sets forth the carrying value of our long-term debt as of December 28, 2001, which approximates its fair value at such date after taking into consideration current rates offered to us for similar debt instruments of comparable maturities. We do not hold or issue financial instruments or derivative financial instruments for trading purposes (dollars in thousands):
APPROX. FAIR 2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE ---- ---- ---- ----- ----- ---------- ------- ------- LIABILITIES Long-term debt Fixed rate: Euro (1).................... $122 $9,154 $ 110 $ 85 $ 95 $4,563 $14,129 $14,129 Wt. ave. interest rate...... 9.02% 5.26% 9.02% 9.02% 9.02% 5.69% Variable rate: U.S. Dollar................. $75,000 $75,000 $75,000 Wt. ave. interest rate...... 2.91%
- ------------ (1) U.S. dollar equivalent FOREIGN CURRENCY RISK As of December 28, 2001, substantially all of our cash assets were denominated in U.S. dollars. However, we conduct business in various foreign currencies, including those of emerging market countries in Asia and well-developed European countries. We utilize derivative financial instruments, primarily forward exchange contracts and currency options, to manage foreign currency risks. In accordance with SFAS 133, gains and losses related to qualified hedges of firm commitments and anticipated transactions are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transactions occurs. All other forward exchange and options contracts are mark-to-market and unrealized gains and losses are included in current period net income. These contracts guarantee a predetermined rate of exchange at the time the contract is purchased. This allows us to shift the majority of the risk of currency fluctuations from the date of the contract to a third party for a fee. We believe there are two potential risks of holding these instruments. The first is that the foreign currency being hedged could move in a direction which could create a better economic outcome than if hedging had not taken place. The second risk is that the counterparty to a currency hedge defaults on its obligations. We reduce the risk of counterparty default by entering into relatively short-term hedges with well capitalized and highly rated banks. In determining the use of forward exchange contracts and currency options, we consider the amount of sales and purchases made in local currencies, the type of currency, and the costs associated with the contracts. In addition, beginning in the third quarter of 2001, we began to employ foreign exchange forward contracts to hedge foreign currency risks associated with intercompany loans. As of December 28, 2001, we had five foreign exchange forward contracts with an aggregate principal balance of approximately $39.3 million outstanding on a U.S. dollar equivalent basis. The terms of these contracts were from one to six months. We did not have any other financial derivative instruments as of December 28, 2001. The table below provides information about our other non-derivative, non-U.S. dollar denominated financial instruments and presents the information in equivalent U.S. dollars. Amounts set forth under "Liabilities" represent principal amounts and related weighted average interest rates by year of maturity for our foreign currency debt obligations. The column captioned "Approximate Fair Value" sets forth the carrying 26 value of our foreign currency long-term debt as of December 28, 2001, which approximates its fair value at such date after taking into consideration current rates offered to use for similar debt instruments of comparable maturities (dollars in thousands):
APPROX. FAIR 2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE ------ ---- ---- ----- ----- ---------- ------- ------- ASSETS Cash and equivalents Variable rate: Euro(1)...................... $7,206 $ 7,206 $ 7,206 Other currencies(1).......... $2,544 $ 2,544 $ 2,544 LIABILITIES Long-term debt Fixed rate: Euro(1)...................... $ 122 $9,154 $110 $ 85 $ 95 $4,563 $14,129 $14,129 Wt. ave. interest rate....... 9.02% 5.26% 9.02% 9.02% 9.02% 5.69%
- ------------ (1) U.S. dollar equivalent 27 BUSINESS GENERAL Overview. We are a global producer of precision-engineered passive magnetics-based electronic components and electrical contact products and materials. We believe we are a leading global producer of these products and materials in the primary markets we serve. Passive magnetics-based electronic components are used in virtually all types of electronic products to manage and regulate electronic signals and power. Electrical contact products and materials are used in any device in which the continuation or interruption of electrical currents is necessary. In each case, our products are critical to the functioning of the end product. Our world-class design and manufacturing capabilities, together with the breadth of our product offerings, provides us with a competitive advantage that enables us to anticipate and deliver highly-customized solutions for our customers' product needs. In addition, our global presence enables us to participate in all relevant product and geographic markets and provides us with proximity to our global customer base. This allows us to better understand and more easily satisfy our customers' unique design and product requirements. We operate our business in two distinct segments: -- the electronic components segment, which operates under the name Pulse, and -- the electrical contact products segment, which operates under the name AMI Doduco. Pulse. Pulse designs and manufactures a wide variety of highly-customized passive magnetics-based electronic components. These components manage and regulate electronic signals and power for use in a variety of devices by filtering out radio frequency interference and adjusting and ensuring proper current and voltage. These products are often referred to as chokes, inductors, filters and transformers. Pulse sells its products to multinational original equipment manufacturers, contract manufacturers and distributors. Some of the customers and original equipment manufacturer end-users of Pulse's products include:
-- Alcatel -- Intel -- Arrow -- Jabil -- Avnet -- Lucent -- Cisco -- Solectron -- Flextronics -- 3Com
Pulse's products are used in a broad array of industries, including:
-- telecommunications -- automotive -- enterprise networking -- consumer electronics -- power conversion -- military/aerospace
Representative end products that use Pulse's components include:
-- Ethernet switches -- routers -- voice over Internet equipment -- automotive controls -- broadband access equipment, -- video game consoles including cable modems and digital -- power supplies subscriber line, or DSL, devices -- military/aerospace navigation and for telephone central office and weapon guidance systems home use
Pulse's products are generally characterized by short life cycles and rapid technological change. This allows us to utilize our design and engineering expertise to meet our customers evolving needs. We believe that the industries served by Pulse have been and will continue to be characterized by ongoing product innovation that will drive the growth in the passive magnetics-based electronic components industry. Pulse represented $253.3 million, or 53.4%, of our revenues for the year ended December 28, 2001 and $438.8 million, or 66.0%, of our revenues for the year ended December 29, 2000. Excluding restructuring 28 charges, Pulse represented $9.4 million, or 59.8%, of our operating profit for the year ended December 28, 2001 and $110.9 million, or 89.9%, of our operating profit for the year ended December 29, 2000. AMI Doduco. We believe AMI Doduco is the only global manufacturer that produces a full range of electrical contact products, from contact materials to completed contact subassemblies. Contact products complete or interrupt electrical circuits in virtually every electrical device. AMI Doduco provides its customers with a broad array of highly engineered products and tools designed to meet unique customer needs. AMI Doduco sells its products to multinational original equipment manufacturers, including:
-- ABB Group -- Groupe Schneider/Square D -- Eaton -- Siemens -- Emerson Electric -- Tyco -- GE
AMI Doduco's products are used in a broad array of industries, including:
-- appliance -- electric power -- automotive -- commercial and industrial machinery -- building construction circuitry -- telecommunications
Representative end products that use AMI Doduco's products include:
-- electrical circuit breakers -- sensors -- switches and relays -- power substations -- motor and temperature controls -- telephone equipment -- wiring devices
AMI Doduco's products are generally characterized by longer life cycles and slower technological change, providing longer life cycle revenue streams than Pulse's products. We believe that expansion and technological developments in some of the industries served by AMI Doduco, particularly in the electric power, appliance and automotive industries, along with opportunities arising from customer outsourcing and consolidation of the electrical contact industry, present attractive growth opportunities for AMI Doduco. AMI Doduco represented $220.9 million, or 46.6%, of our revenues for the year ended December 28, 2001 and $225.6 million, or 34.0%, of our revenues for the year ended December 29, 2000. Excluding restructuring charges, AMI Doduco represented $6.3 million, or 40.2%, of our operating profit for the year ended December 28, 2001 and $12.5 million, or 10.1% of our operating profit for the year ended December 29, 2000. OUR BUSINESS STRATEGY Our overall strategy is to further enhance our market positions in the passive magnetics-based electronic component and electrical contact products industries. In order to accomplish this we intend to: Focus On Attractive Growth Markets. We seek to aggressively address and penetrate attractive markets for our products by employing our design and manufacturing expertise and pursuing our acquisition strategy. By doing so, we intend to achieve profitable growth and revenue diversification across end markets, geographies and customers. We believe significant opportunities for our products exist within: -- end markets with evolving innovative technologies, -- markets in which we have a significant presence, including telecommunications and enterprise networking, and -- markets in which we are expanding our presence, including the automotive, consumer electronics and military/aerospace industries. 29 For example, we are expanding our existing presence in the enterprise networking market by developing ultra high-speed Ethernet products. Examples of expansion into new markets include our efforts to develop products for the automotive industry to be used with the new 42-volt electrical system, products for the consumer electronics industry for use in video game consoles, broadband access technologies such as digital subscriber line and cable modem equipment, home computer networks and feature-rich appliances. Utilize Our Engineering And Design Capabilities. We will continue to support and utilize our world-class engineering capabilities in order to achieve superior product and tooling designs for our customers. We collaborate with our customers to design customized products and tools that are early in their life cycles. This typically creates higher margin opportunities. Our unique mix of people, facilities and software applications enables us to satisfy our customers' continuing needs for smaller, more efficient products. Given the highly technical nature of our customers' needs, our direct salespeople typically team up with members of our engineering staff to collaborate with a customer's sales and engineering personnel. During the sales process, there is close engineer-to-engineer interaction between our engineers and those in our customers' organizations. This interaction extends throughout a product's life cycle, engendering strong relationships with our customers. We strive to anticipate our customers' evolving design needs early and to become integral partners for their next generation products. Achieve the Lowest Cost, Highest Quality Manufacturing. We strive to achieve the lowest manufacturing cost and the highest manufacturing quality. In order to continually reduce its manufacturing costs, Pulse has established significant manufacturing capacity in the People's Republic of China, or PRC, and Mexico, while eliminating manufacturing capacity in higher cost areas. Our manufacturing business model at Pulse has a very high variable cost component due to the labor-intensity of many processes. This makes it relatively easy for us to change our capacity based on market demand. Pulse's ability to successfully manufacture and operate in the PRC for more than 15 years has provided it with a significant competitive advantage. AMI Doduco continues to reduce its manufacturing costs by consolidating facilities and relocating labor intensive production to lower cost areas such as the PRC, Mexico, Estonia and Hungary. In addition, AMI Doduco has continued to invest to upgrade and enhance production capabilities in those areas where mechanization or automation enhances our manufacturing quality or efficiencies. Continue To Undertake Strategic Acquisitions and Attractive Outsourcing Opportunities. We intend to continue to make acquisitions and pursue outsourcing opportunities from our customers in order to: -- enhance growth, -- enter new product markets, -- expand our design and manufacturing talent, -- increase our global presence, -- consolidate markets within our existing product lines, and -- reduce cost and create synergies. Since 1994, we have completed 15 acquisitions and have capitalized on a number of customer outsourcing opportunities. We believe that our sophisticated and disciplined approach in identifying, structuring, closing and integrating acquisitions and outsourcing opportunities has allowed us to be successful in our acquisition and outsourcing strategy. For example, Pulse recently acquired Excelsus, a producer of customer-premises digital subscriber line filters and other broadband accessories, to address the consumer market for high speed communications. In addition, AMI Doduco recently acquired the electrical contacts business of Engelhard-CLAL to more effectively penetrate the French and the UK markets and to enhance our manufacturing capabilities. Recent new outsourcing business includes the contact parts assembly business of a circuit breaker manufacturer, captured by AMI Doduco, and the magnetics production operations of a power supply manufacturer, captured by Pulse. 30 Focus On Economic Profit and Financial Flexibility. We manage our business with a primary focus on creating economic profit because we believe this is the most relevant indicator of shareholder value creation. We define economic profit as after tax operating profit less our cost of capital. In addition, we seek to maintain a strong balance sheet in order to preserve flexibility through the business cycle and to exploit growth opportunities when they arise. Economic profit and financial flexibility drive our: -- capital spending, -- acquisition pricing and product pricing decisions, and -- cost management programs. We have directly linked the bulk of our management incentives to our managers' ability to meet or exceed both economic profit and net operating profit targets. PRODUCTS Pulse. Pulse designs and manufactures a wide array of passive magnetics-based electronic components. These products are highly-customized to address our customers' needs. The following table contains a list of some of Pulse's key products:
- -------------------------------------------------------------------------------------------------- PRODUCT FUNCTION APPLICATION - -------------------------------------------------------------------------------------------------- Discrete Filter or Choke Removes interference, or noise, Network switches, routers, hubs from circuitry and personal computers Automotive electronics Phone, fax and alarm systems used with digital subscriber lines, or DSL - -------------------------------------------------------------------------------------------------- Filtered Connector, which Removes interference, or noise, Local area networks, or LANs, and combines a filter with a from circuitry and connects wide area networks, or WANs, connector electronic applications equipment for personal computers and video game consoles - -------------------------------------------------------------------------------------------------- Inductor/chip inductor Regulates electrical current AC/DC & DC/DC power supplies under conditions of varying load Mobile phones and portable devices - -------------------------------------------------------------------------------------------------- Power Transformer Modifies circuit voltage AC/DC & DC/DC power supplies - -------------------------------------------------------------------------------------------------- Signal Transformer Limits distortion of signal as it Analog circuitry passes from one medium to another Military/aerospace navigation and weapon guidance systems - --------------------------------------------------------------------------------------------------
AMI Doduco. AMI Doduco designs and manufactures a wide array of contact materials, parts and completed contact subassemblies. The following table contains a list of some of AMI Doduco's key products:
- -------------------------------------------------------------------------------------------------- PRODUCT FUNCTION APPLICATION - -------------------------------------------------------------------------------------------------- Contact prematerial such as Raw materials Made into our customers' wire and metal tapes electrical contact parts - -------------------------------------------------------------------------------------------------- Electrical contact parts, Complete or interrupt an Electrical switches, relays, either discrete or affixed electrical circuit circuit breakers and motor to precision stamped parts controls - -------------------------------------------------------------------------------------------------- Component subassemblies Integrate contact with precision Sensors and control devices stampings and plastic housings - --------------------------------------------------------------------------------------------------
31 SALES, MARKETING AND DISTRIBUTION Each of Pulse and AMI Doduco sells its products predominantly through its own separate worldwide direct sales force. Given the highly technical nature of our customers' needs, our direct salespeople typically team up with members of our engineering staff to discuss a sale with a customer's sales and engineering personnel. During the sales process, there is close engineer-to-engineer interaction between our engineers and those in our customers' organizations. This interaction extends throughout a product's life cycle, engendering strong customer relationships. As of December 28, 2001, Pulse had 52 salespeople and 13 sales offices worldwide and AMI Doduco had 28 salespeople and 11 sales offices worldwide. We provide technical and sales support for our direct and indirect sales force. We believe that our coordinated sales effort provides a high level of market penetration and efficient coverage of our customers on a cost-effective basis. CUSTOMERS AND END MARKETS We sell our products and services to original equipment manufacturers, or OEMs, which design, build and market end-user products. Pulse also sells its products to contract manufacturers, or CEMs, which are companies hired by OEMs to manufacture their products, as well as to independent distributors, which sell components and materials to both OEMs and CEMs. In recent years, the trend in the electronics industry has been for many OEMs to use CEMs primarily or exclusively to build their products. Nonetheless, OEMs often control the decision as to which component designs best meet their needs. Accordingly, we consider OEMs to be customers for our products even if they purchase our products through CEMs or independent distributors. In order to maximize our sales opportunities, Pulse's engineering and sales teams also maintain close relationships with CEMs and distributors. We seek to capitalize on our core competencies by focusing on the following markets, end-users and customers:
- -------------------------------------------------------------------------------------------------- BUSINESS END MARKET OEM END-USERS CEMS DISTRIBUTORS - -------------------------------------------------------------------------------------------------- PULSE telecommunications, Alcatel, Cisco Flextronics Arrow enterprise Systems, Emerson/ Jabil Avnet networking, power Astec, Honeywell, Solectron conversion, Intel, Lockheed automotive, Martin, Lucent, consumer Motorola, Nortel electronics and Networks, 3Com, military/ aerospace Tyco and Visteon - -------------------------------------------------------------------------------------------------- AMI DODUCO appliance, ABB Group, Allen N/A N/A automotive, Bradley, Eaton, building Emerson Electric, construction GE, Groupe circuitry, electric Schneider/Square D, power, commercial Robert Bosch, and industrial Siemens and Tyco machinery and telecommunications - --------------------------------------------------------------------------------------------------
No customer of either Pulse or AMI Doduco accounted for more than 10% of our net sales during the year ended December 28, 2001 or for the year ended December 29, 2000. Sales to our ten largest customers accounted for 30.7% of net sales during the year ended December 28, 2001 and 35.9% of net sales for the year ended December 29, 2000. An increasing percentage of our sales in recent years has been outside of the United States. We now have operations in 12 countries. For the year ended December 28, 2001, 64.9% of our net sales were outside of the United States. For the year ended December 29, 2000, 55.5% of our net sales were to customers outside of the United States. Sales made by Pulse to its customers outside the United States accounted for 63.8% of its net sales for the year ended December 28, 2001 and 54.7% of its net sales for the year ended December 29, 2000. 32 Sales made by AMI Doduco to its customers outside the United States accounted for 69.4% of its net sales for the year ended December 28, 2001 and 61.1% of its net sales for the year ended December 29, 2000. DEVELOPMENT AND ENGINEERING Our development and engineering efforts are focused on the design and development of innovative products in collaboration with our customers. We work closely with OEMs to identify their design and engineering requirements. We maintain strategically located design centers throughout the world where proximity to customers enables us to better understand and more easily satisfy their design and engineering needs. Pulse's design process is a disciplined, orderly process that uses a product data management system to track the level of design activity enabling us to manage and improve how our engineers design products. Pulse typically owns the customized designs that it uses to make its products. Pulse's development and engineering expenditures were $16.0 million for the year ended December 28, 2001 and $15.7 million for the year ended December 29, 2000. AMI Doduco's development and engineering expenditures were $4.2 million for the year ended December 28, 2001 and $4.4 million for the year ended December 29, 2000. We intend to continue to invest in personnel and new technologies to improve product performance. MANUFACTURING AND FACILITIES We are headquartered in Trevose, Pennsylvania where we lease 11,000 square feet of office space. Through Pulse and AMI Doduco, we operated 25 manufacturing plants in 10 countries as of December 28, 2001. We continually seek to size our operations correctly in order to maximize cost efficiencies. Accordingly, in the future, we may take further actions to increase or decrease our manufacturing capacity. To maximize production efficiencies, we seek whenever practical to establish manufacturing facilities in countries where we can take advantage of lower labor costs and, if available, various government incentives and tax benefits. We also seek to maintain facilities in those regions where we market our products in order to maintain a local presence in proximity to our customers. The following is a list of the locations of our principal manufacturing facilities: Pulse.
PERCENTAGE APPROX. OWNED/ USED FOR LOCATION(1) SQUARE FT.(2) LEASED MANUFACTURING - ------------------------------------------- ------------- ------ ------------- Dongguan, People's Republic of China, or PRC...................................... 482,000 Leased 100% Zhuhai, PRC................................ 252,000 Leased 100% Cavite, Philippines........................ 49,000 Owned 62% Mexico City, Mexico........................ 46,000 Leased 100% Orgelet, France............................ 38,000 Owned(3) 30% Zhongshan, PRC............................. 37,000 Leased 100% Greensboro, Maryland....................... 20,000 Owned 95% ------- Total............................ 924,000
- ------------ (1) In addition to these manufacturing locations, Pulse has 252,000 square feet of space which is used for engineering, sales and administrative support functions, including Pulse's headquarters in San Diego, California. In addition, Pulse leases approximately 1,621,000 square feet of space for dormitories, canteen and other employee-related facilities in the PRC. (2) Consists of aggregate square footage in each locality where manufacturing facilities are located. More than one manufacturing facility may be located within each locality. (3) There are mortgages on this property related to mortgage notes due in 2007, of which approximately $0.7 million was outstanding as of December 28, 2001. 33 AMI Doduco.
PERCENTAGE APPROX. OWNED/ USED FOR LOCATION(1) SQUARE FT. LEASED MANUFACTURING - --------------------------------------------- ----------- ------ ------------- Pforzheim, Germany........................... 490,000 Owned 65% Reidsville, North Carolina................... 260,000 Owned 60% Sinsheim, Germany............................ 222,000 Owned 57% Export, Pennsylvania......................... 115,000 Leased 80% Tianjin, PRC................................. 59,000 Leased 85% Noisy, France................................ 43,000 Leased 88% Luquillo, Puerto Rico........................ 32,000 Owned 80% Madrid, Spain................................ 32,000 Owned 90% Mexico City, Mexico.......................... 25,000 Leased 84% Tallinn, Estonia............................. 23,000 Owned 80% Lentate S/Seveso, Italy...................... 23,000 Leased 90% Madrid, Spain................................ 19,000 Leased 90% Lancaster, Pennsylvania...................... 15,000 Leased 85% Dorog, Hungary............................... 11,000 Leased 95% --------- Total.............................. 1,369,000
- ------------ (1) Engineering, sales and administrative support functions for AMI Doduco are generally contained in these locations. We have developed our manufacturing processes in ways intended to maximize our economic profitability. Accordingly, the manufacturing processes at Pulse facilities maintain a cost structure that is labor intensive and highly variable, which enables us to increase and decrease production rapidly and to contain costs during slower periods. On the other hand, AMI Doduco's products tend to have longer business cycles, longer time to market and are more capital intensive. As a result, we have automated many more functions at AMI Doduco facilities and vertically integrated its products in an attempt to utilize all of our manufacturing capabilities to create higher value added products. Traditionally, our engineers design products to meet our customers' product needs and then we mass-produce the products once a contract is awarded by or orders are received from our customer. We also service customers that design their own components and outsource production of these components to us. We then build the components to the customer's design. COMPETITION We believe we are a market leader in the industries and geographic locations in which we operate. We do not believe that any one company competes with all of the product lines of either Pulse or AMI Doduco on a global basis. However, both Pulse and AMI Doduco frequently encounter strong competition within individual product lines, both domestically and internationally. In addition, several OEMs internally manufacture many of the products offered by Pulse or AMI Doduco. We believe that this represents an opportunity to capture additional market share as OEMs decide to outsource business. Therefore, we constantly work to identify these opportunities and to convince these OEMs that our economies of scale, purchasing power and manufacturing core competencies enable us to produce these products better and more efficiently. Competitive factors in the markets for our products include: -- product quality and reliability, -- global design and manufacturing capabilities, -- breadth of product line, -- customer service, and -- price. 34 We believe we compete favorably on the basis of each of these factors. Product quality and reliability, as well as design and manufacturing capabilities, are enhanced through our commitment to continually invest in and improve our manufacturing and designing resources and our close relationships with our customers' engineers. The breadth of our product offering provides customers with the ability to satisfy their entire magnetic component and contact needs through one supplier. Our global presence enables us to deepen our relationship with our customers and to better understand and more easily satisfy the needs of local markets. In addition, our ability to purchase raw materials in large quantities reduces our manufacturing costs, enabling us to price our products competitively. EMPLOYEES As of December 28, 2001, we had approximately 14,800 full-time employees as compared to 30,600 as of December 29, 2000. Of the 14,800 full-time employees, approximately 1,200 were located in the United States and approximately 60 employees in the United States were covered by collective-bargaining arrangements. In addition, some foreign employees are members of trade and government-affiliated unions. We have not experienced any major work stoppages and consider our relations with our employees to be good. The vast majority of the employee reductions for the year ended December 28, 2001 came from voluntary attrition and involuntary workforce reductions at manufacturing facilities in the PRC, where severance payments are unnecessary. RAW MATERIALS Raw materials necessary for the manufacture of our products include: -- ferrite cores, -- precious metals, and -- copper, brass and bronze. We currently do not have any difficulty obtaining any of our raw materials and do not currently anticipate that we will face any significant difficulties in the near future. However, many of the raw materials we use are considered commodities and are subject to price volatility. Although we are not dependent on any one particular source of supply, several of our raw materials are only sold by a limited number of suppliers, which may have an adverse affect on the price of these materials. Should prices rise or a shortage occur in any necessary raw material, our manufacturing costs will likely increase, which may result in lower margins or decreased sales. AMI Doduco uses precious metals, primarily silver, in manufacturing a vast majority of its electrical contacts, contact materials and contact subassemblies. Historically, we have leased or held these materials through consignment arrangements with our suppliers. Leasing and consignment costs have been substantially below the costs to borrow funds to purchase the metals and these arrangements eliminate the fluctuations in the market price of owned precious metal. AMI Doduco's terms of sale allow us to charge customers for the fabricated market value of silver on the day that we deliver the silver bearing product to the customer. BACKLOG Our backlog of orders as of December 28, 2001 was $48.2 million compared to $182.9 million as of December 29, 2000. We expect to ship the majority of the backlog over the next six months. Customers, however, can cancel orders at any time, sometimes requiring a payment of cancellation charges. We do not believe that backlog is an accurate indicator of near-term business activity as customers may make multiple orders of the same component from multiple sources when lead times are long and may cancel orders when business is weak and inventories are excessive. Pulse has experienced a significant number of cancellations and order push outs as a result of the current downturn in the market for electronic equipment. Conversely, many of AMI Doduco's products are repeat products which are continuously ordered by customers by phone for delivery within several days. In addition, in the last two years, many customers have 35 negotiated vendor managed inventory and other similar consignment type arrangements with us, particularly Pulse. Orders from these arrangements typically are not reflected in backlog prior to shipment. INTELLECTUAL PROPERTY We own a number of patents and have acquired licenses under patents of others under license agreements, which impose restrictions on our ability to utilize the intellectual property. We seek to limit disclosure of our intellectual property by generally requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our proprietary information. Existing legal protections afford only limited protection for our products. For example, others may independently develop similar or competing products or attempt to copy or use aspects of our products that we regard as proprietary. Furthermore, intellectual property law may not fully protect products or technology that we consider to be our own, and claims of intellectual property infringement may be asserted against us or against our customers in connection with their use of our products. While our intellectual property is important to us in the aggregate, we do not believe any individual patent or license is material to our business or operations. ENVIRONMENTAL Our manufacturing operations are subject to a variety of local, state, federal, and international environmental laws and regulations governing air emissions, wastewater discharges, the storage, use, handling, disposal and remediation of hazardous substances, wastes and chemicals and employee health and safety. We will continue to make expenditures to meet or exceed the environmental standards set by these laws. We are involved in several legal actions relating to non-owned waste disposal sites. Our involvement in these matters has generally arisen from the alleged disposal by waste haulers of small amounts of waste material many years ago. In addition, we are aware of contamination at two locations. In Sinsheim, Germany, there is shallow groundwater and soil contamination that is naturally decreasing over time. The German environmental authorities have not required corrective action to date. A property in Leesburg, Indiana, which was acquired with our acquisition of GTI in 1998, is the subject of a 1994 Corrective Action Order to GTI by the Indiana Department of Environmental Management. The order requires us to investigate and take corrective actions. Monitoring data is being collected to confirm and implement the corrective measures. We anticipate making additional environmental expenditures in future years to continue our environmental studies, analysis and remediation activities. While we cannot predict the future costs of environmental studies, cleanup activities, capital expenditures, or operating costs for environmental compliance at our present or former facilities or any third party disposal sites, we do not believe these costs, individually or in the aggregate, will have a material impact on our operations or our consolidated financial position, liquidity or operating results. LEGAL PROCEEDINGS We or our subsidiaries are a party to various legal proceedings and administrative actions. We consider lawsuits to be part of what arises in the normal course of business. Although it is difficult to predict the outcome of any legal proceeding, we do not believe these proceedings and actions will, individually or in the aggregate, have a material adverse effect on our consolidated financial condition or results of operations. 36 MANAGEMENT Our directors and executive officers are:
NAME AGE POSITION - ---- --- -------- James M. Papada, III................. 53 Chairman of the Board, Chief Executive Officer and President Albert Thorp, III.................... 46 Vice President of Finance and Chief Financial Officer John L. Kowalski..................... 58 Vice President David W. Lacey....................... 57 Vice President of Human Resources Drew A. Moyer........................ 37 Corporate Controller and Secretary Thomas J. Considine, Jr. ............ 48 Treasurer David J. Stakun...................... 46 Vice President of Corporate Communications Stanley E. Basara.................... 68 Director John E. Burrows, Jr. ................ 54 Director Rajiv L. Gupta....................... 56 Director J. Barton Harrison................... 72 Director David H. Hofmann..................... 64 Director Graham Humes......................... 69 Director Edward M. Mazze...................... 61 Director C. Mark Melliar-Smith................ 56 Director
James M. Papada, III has served as our Chairman of the Board since January 1996 and our Chief Executive Officer and President since July 1999. He has been a director of Technitrol since 1983. He was our interim Chief Executive Officer from January 8, 1999 to June 30, 1999. Before joining us, he was a partner in the law firm of Stradley, Ronon, Stevens & Young from 1987 through June 1999. This firm is our outside counsel and is representing us in this offering. He was President and Chief Operating Officer of Hordis Brothers, a glass fabricator, from 1983 until 1987. Mr. Papada is a director of Para-Chem Southern, a specialty chemicals manufacturer and distributor, and Glasstech Holding, a designer and assembler of glass blending and tempering systems that are used by glass manufacturers and processors. Albert Thorp, III has served as our Vice President of Finance and Chief Financial Officer since 1995. He joined us as Corporate Controller in 1989. He held the additional position of Treasurer from 1995 until March 1997 and from July 2000 to November 2000. Mr. Thorp is a Certified Public Accountant. John L. Kowalski has served as our Vice President since 1995. He has also served as President of Pulse since 1995. Mr. Kowalski was President of the Fil-Mag Group, a former subsidiary of Technitrol, from 1994 through its consolidation into Pulse in 1995, and he was General Manager of our components division from 1990 to 1995. Prior to joining us, he held various management positions at Honeywell, General Electric and Varian. Mr. Kowalski is a director of the San Diego World Trade Center. David W. Lacey has served as our Vice President of Human Resources since July 1998. Prior to joining us, he was Vice President of Human Resources with The Hay Group, a human resources consulting firm, from 1995 to June 1998, and was Senior Vice President and Deputy Director Human Resources for First Fidelity Bank from 1992 until 1995. Drew A. Moyer has served as our Corporate Controller since 1995 and our Secretary since 1996. Mr. Moyer joined us in 1989 and was our Corporate Accountant and Internal Auditor prior to 1995. Mr. Moyer was previously employed by Ernst & Young and is a Certified Public Accountant. Thomas J. Considine, Jr. has served as our Treasurer since November 2000. From April 1998 until November 2000, he was the Treasurer of Vlasic Foods, a packaged food company. From 1996 until March 1998, he held the position of Assistant Treasurer of Armstrong World Industries, a manufacturer of vinyl floors and ceilings. Prior to that, he held several finance positions at Campbell Soup Company, a packaged food company, from December 1995 until September 1996. 37 David J. Stakun has served as our Vice President of Corporate Communications since March 1997. From 1987 until March 1997, Mr. Stakun held various communications positions of increasing responsibility at Bell Atlantic, including Director--Corporate and Financial Communications from 1995 until joining us. Before joining Bell Atlantic, Mr. Stakun held various communications positions at Sears and Peoples Energy. Stanley E. Basara was the President and Chief Operating Officer of Panasonic Broadcasting Systems, a provider of professional television equipment for television stations, from 1987 through his retirement in February 1999. Mr. Basara has served as a director of Technitrol since 1993. John E. Burrows, Jr. has been the President and Chief Executive Officer of SPI Holding, a global producer of specialty chemicals, since 1995. From 1990 through 1995, he was Vice President-North America of Quaker Chemical, a worldwide manufacturer and distributor of specialty chemicals and a provider of chemical management services for manufacturers. Mr. Burrows has served as a director of Technitrol since 1994. Rajiv L. Gupta has been Chairman and Chief Executive Officer of Rohm and Haas, a specialty chemical manufacturer, since October 1999. Since joining Rohm and Haas in 1971, he has held various positions of increasing responsibility in finance and strategic planning. He has been a director of Rohm and Haas since December 1998. Mr. Gupta also serves on the board of the American Chemistry Council. Mr. Gupta has served as a director of Technitrol since April 1998. J. Barton Harrison had served as our Secretary from 1975 to 1977 and from 1983 until his retirement in 1995. He is a director of Steel Plant Equipment, a manufacturer of industrial equipment primarily for the steel and paper industries. Mr. Harrison has served as a director of Technitrol since 1966. David H. Hofmann has been the President of The Bryce Company, a privately-held consumer packaging concern, since August 1999. Mr. Hofmann worked as a consultant to the consumer packaging industry from July 1997 through August 1999. From 1989 through July 1997, he served as President and Chief Executive Officer of Graphic Packaging, a manufacturer of packaging for consumer goods. From 1980 through 1989, he was President of the Perfecseal Division of Paper Manufacturers, a manufacturer of sterile packaging for disposable medical devices. Mr. Hofmann has served as a director of Technitrol since 2000. Graham Humes was a principal of Compass Capital Partners, a corporate finance advisory group, from 1995 through his retirement in June 1999. He was General Director of CARESBAC-St. Petersburg, a small business venture capital company in St. Petersburg, Russian Federation, from 1993 to 1995. He is a director of Brunschwig & Fils, Baltic Cranberry, Cherry Valley Spring Water, and the George M. Leader Family Corporation. Mr. Humes has served as a director of Technitrol since 1987. Dr. Edward M. Mazze is Dean of the College of Business Administration and holder of the Alfred J. Verrecchia-Hasbro Inc. Leadership Chair in Business at the University of Rhode Island. From July 1993 to June 1998, he was Dean of The Belk College of Business Administration, The University of North Carolina at Charlotte. Previously, he held similar positions at Temple University and Seton Hall University. Dr. Mazze is an honorary Trustee of Delaware Valley College of Science and Agriculture and a member of the board of directors of Washington Trust Bancorp and the Barrett Growth Fund. Dr. Mazze has served as a director of Technitrol since 1985. C. Mark Melliar-Smith has been a Venture Partner with Austin Ventures, a venture capital firm that focuses on telecommunications, semiconductor and software businesses, since January 2002. From January 1997 to December 2001, Mr. Melliar-Smith was President and Chief Executive Officer of International SEMATECH, a research and development consortium in the integrated circuit industry. He was Chief Technical Officer of Lucent Technologies Microelectronics, the forerunner of Agere Systems, from January 1990 through December 1996. Mr. Melliar-Smith joined AT&T in 1970 and held a variety of key engineering and management positions, including Executive Director at Bell Laboratories Photonics and Microelectronics Division. Mr. Melliar-Smith also serves as a director of Power One and Molecular Imprints. He became a director of Technitrol in January 2002. 38 PRINCIPAL SHAREHOLDERS The following table sets forth information with respect to the beneficial ownership of our common stock as of February 26, 2002, and as adjusted to reflect the sale of the shares of common stock offered in this offering, by: -- our chief executive officer and each of our four next most highly compensated executive officers during the fiscal year ended December 28, 2001, -- each person or group of affiliated persons who is known by us to own beneficially 5% or more of our common stock, -- each of our directors, and -- all directors and executive officers as a group. This table assumes no exercise of the underwriters' over-allotment option. Percentage of ownership is based on 33,719,912 shares of our common stock outstanding on February 26, 2002 and 39,319,912 shares of common stock outstanding after completion of this offering. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. Unless otherwise indicated, the address for each of the persons listed below is c/o Technitrol, Inc. 1210 Northbrook Drive, Suite 385, Trevose, Pennsylvania 19053.
NUMBER OF SHARES PERCENT OF CLASS PERCENT OF CLASS NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING - ------------------------------------- ------------------ ---------------- ---------------- Virginia Frese Palmer/ Palmer Family Trusts............... 2,566,500(1) 7.6% 6.5% Stanley E. Basara.................... 16,796(2) * * John E. Burrows, Jr. ................ 12,750 * * Rajiv L. Gupta....................... 5,670 * * J. Barton Harrison................... 2,710,430(3) 8.0% 6.9 David H. Hofmann..................... 862 * * Graham Humes......................... 224,415(4) * * John L. Kowalski..................... 65,337(5) * * David W. Lacey....................... 12,231(6) * * Edward M. Mazze...................... 11,780 * * C. Mark Melliar-Smith................ -0- * * Drew A. Moyer........................ 18,072(7) * * James M. Papada, III................. 103,363(8) * * Albert Thorp, III.................... 23,166(9) * * Directors and executive officers as a group (15 people).................. 3,214,927(10) 9.5 8.2
- ------------ * Less than one percent (1%). (1) Consists of 1,779,184 shares held by the Palmer Family Trust--Survivor's Share, 651,300 shares held by the Virginia Frese Palmer Charitable Remainder Unitrust, dated June 20, 2000, and 136,016 shares held by the Palmer Family Trust--Residuary Trust Share. The co-trustees of these three trusts are Virginia Frese Palmer and J. Barton Harrison. Mrs. Palmer and Mr. Harrison, one of our directors, share voting power and investment power with respect to these trusts. Mrs. Palmer is the widow of Gordon Palmer, Jr., one of the company's founders. The address of each of the trusts is c/o Palmer Family Trusts, 7147 E. Sabino Vista Circle, Tucson, AZ 85750. (2) Consists of 13,976 shares directly owned by Mr. Basara and 2,820 shares owned by Mr. Basara's wife. Mr. Basara disclaims any beneficial interest in the shares owned by his spouse. 39 (3) Consists of 143,930 shares directly owned by Mr. Harrison and 2,566,500 shares held by the three Palmer Trusts described in footnote (2) above. Mr. Harrison disclaims any beneficial interest in the shares owned by the Palmer Family Trust--Survivor's Share for which he is a co-trustee. (4) Consists of 156,318 shares directly owned by Mr. Humes, 36,053 shares owned by Mr. Humes' spouse and 32,044 shares owned by a trust for which Mr. Humes' spouse is co-trustee. Mr. Humes disclaims any beneficial interest in the shares owned by his spouse or those shares owned by a trust for which his spouse is co-trustee. (5) Consists of 27,958 shares directly owned by Mr. Kowalski and 37,379 shares owned by a trust for which Mr. Kowalski and his spouse are co-trustees. Includes 15,880 shares which are subject to forfeiture and restrictions on transfer pursuant to our restricted stock plan. (6) Includes 2,250 shares which are subject to forfeiture and restrictions on transfer pursuant to our restricted stock plan. (7) Includes 6,700 shares which are subject to forfeiture and restrictions on transfer pursuant to our restricted stock plan. (8) Includes 73,200 shares which are subject to forfeiture and restrictions on transfer pursuant to our restricted stock plan. (9) Includes 9,030 shares which are subject to forfeiture and restrictions on transfer pursuant to our restricted stock plan. (10) Includes 111,470 shares which are subject to forfeiture and restrictions on transfer pursuant to our restricted stock plan. 40 DESCRIPTION OF CAPITAL STOCK GENERAL Our authorized capital stock consists of 175,000,000 shares of common stock, par value $0.125 per share. Upon completion of this offering, we will have 39,319,912 shares of common stock issued and outstanding. The following summary of our capital stock is qualified in its entirety by reference to our articles of incorporation and bylaws, which are incorporated by reference as exhibits to the registration statement of which this prospectus forms a part. References to our articles of incorporation in this prospectus refer to our Amended and Restated Articles of Incorporation, as amended, and references to our bylaws in this prospectus refer to our Bylaws, as amended. COMMON STOCK A holder of shares of our common stock is entitled to one vote per share on all matters to be voted upon by shareholders, except in the election for directors which will be by cumulative voting. In the election of directors, each shareholder entitled to vote has the right to multiply the number of votes to which he may be entitled by the total number of directors to be elected in the election, and he may cast the whole number of such votes for one candidate or he may distribute them among any two or more candidates. The candidates receiving the highest number of votes will be elected. We also have a classified board of directors which together with cumulative voting for directors may delay or deter a future takeover or change in control. Unless otherwise required under our articles of incorporation or bylaws or by statute, the affirmative vote of a majority of the shares represented in person or by proxy at the meeting and entitled to vote is required for approval of any matter brought before a meeting of shareholders. The holders of our common stock are entitled to receive ratably such dividends as may be declared from time to time by our board of directors out of funds legally available, subject to the terms of agreements governing our long-term debt. In the event we liquidate, dissolve or wind up our business affairs, the holders of shares of common stock are entitled to share ratably in all assets remaining after payment of liabilities. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of common stock are fully paid and nonassessable, except for shares issued pursuant to our incentive compensation plan. ARTICLES OF INCORPORATION AND BYLAWS Our articles of incorporation and bylaws contain provisions that are intended to enhance the likelihood of continuity and stability in the composition of our board of directors and which may have the effect of delaying, deterring or preventing a future takeover or change in control not approved by our board of directors. These provisions may also render the removal of our current board of directors and of management more difficult. Our articles of incorporation and bylaws provide for a classified board of directors consisting of three classes of directors with each class serving staggered three-year terms. Our articles of incorporation and bylaws also provide that directors may not be removed prior to the expiration of their term of office without cause. These provisions cannot be amended, except upon the affirmative vote of at least 75% of the outstanding shares. Our bylaws provide that vacancies on our board of directors may only be filled by the remaining directors and not by the shareholders. While our president or a majority of our board of directors may call a special meeting of shareholders, our bylaws provide that shareholders may only call a special meeting upon the request of shareholders owning at least 20% of our common stock. Our articles of incorporation provide for a supermajority vote generally in the case of the following types of transactions with a holder of more than 5% of our stock: -- mergers or consolidations in which a vote of shareholders is required by law, 41 -- sales of all or any substantial part of our assets, and -- issuances of securities by us in exchange for securities or assets of the holder of more than 5% of our stock in a transaction in which shareholder approval is required by law or by agreement. Any of these transactions must be approved by the affirmative vote of at least 75% of our outstanding shares, unless a letter of intent or other agreement pertaining to the transaction was approved by our board of directors prior to the time that the other party obtained more than 5% of our shares of stock. This provision of our articles of incorporation requiring a supermajority vote for business transactions can only be amended by the affirmative vote of holders of at least 75% of our outstanding shares. These supermajority requirements could enable a minority of our shareholders to exercise veto power over any extraordinary transactions and amendments. PENNSYLVANIA ANTI-TAKEOVER LAW The following summarizes certain statutory anti-takeover provisions of the Pennsylvania Business Corporation Law of 1988, as amended, or the BCL. Subchapter 25F of the BCL generally prohibits a "business combination" with a shareholder or group of shareholders who, together with affiliates, beneficially own(s) at least 20% of the voting power of a public corporation. This prohibition extends for a five-year period following the date on which the holder became an interested shareholder, unless the transaction is approved in advance by the board of directors of the company or a specified vote of its shareholders. The term business combination is defined broadly to include various merger, consolidation, division, exchange or sale transactions. The BCL provides for further anti-takeover provisions relating to control share acquisitions and disgorgements, however, we have specifically opted out of these provisions pursuant to our bylaws. Under Section 1715 of the BCL, our directors are not required to regard the interests of the shareholders as being dominant or controlling in considering our best interests. The directors may consider, to the extent they deem appropriate, factors including: -- the effects of any action upon any group affected by such action, including our shareholders, employees, suppliers, customers and creditors, and communities in which we have offices or other establishments, -- our short-term and long-term interests, including benefits that may accrue to us from our long-term plans and the possibility that these interests may be best served by our continued independence, -- the resources, intent and conduct of any person seeking to acquire control of us, and -- all other pertinent factors. The above BCL provisions may discourage open market purchases of our common stock or a non-negotiated tender or exchange offer for our common stock and, accordingly, may be considered disadvantageous by a shareholder who would desire to participate in any such transaction. RIGHTS AGREEMENT In August 1996, our board of directors declared a dividend distribution of one purchase right for each outstanding share of our common stock payable to shareholders of record on September 9, 1996. Rights have also been and will be issued in respect of all shares of common stock which become outstanding after September 9, 1996. The rights will become exercisable on a date, referred to as the distribution date, that is the earlier of: -- ten days after a person or group acquires 15% or more of our common stock, or -- ten business days after a person or group commences a tender or exchange offer which, if consummated, would result in that person or group owning at least 15% of our common stock. 42 Prior to the distribution date, the rights cannot be exercised and will not trade separately from our common stock. Following the distribution date, separate certificates representing the rights will be mailed to holders of record of our common stock as of the close of business on the distribution date and the separate rights certificates alone will evidence the rights. The description and terms of the rights are set forth in a Rights Agreement, as amended, between us and Registrar and Transfer Company, as Rights Agent. If a person or group acquires 15% or more of our common stock, all other holders of rights will then be entitled to purchase, by payment of the exercise price for each right, the number of shares of our common stock with a value of twice the exercise price. In addition, at any time after a 15% position is acquired, our board of directors may, at its option, require each outstanding right, other than rights held by the acquiring person or group, to be exchanged for two shares of our common stock. If, following the earlier of the distribution date or an acquisition of 15% or more of our common stock, we are: -- acquired by any person in a merger or other business combination transaction, or -- we sell more than 50% of our assets or earning power to any person, all other holders of rights will then be entitled to purchase common stock of the acquiring company with a value of twice the exercise price per right. We may redeem the rights at $.005 per right at any time prior to the time that a person or group has acquired 15% or more of our common stock. The rights expire on September 9, 2006, unless earlier redeemed or exchanged by us as described above. The rights will not entitle the holder to any benefits of the underlying common stock, including the right to vote and to receive dividends, until the right is exercised. The exercise price and the number of shares or other securities issuable upon exercise of the rights are subject to adjustment from time to time to prevent dilution. The terms of the rights may also be amended by us and the Rights Agent, provided that following the distribution date the amendment does not materially adversely affect the interests of holders of rights other than an acquiring person. The rights have anti-takeover effects. The rights may cause substantial dilution to a person or group that attempts to acquire us without conditioning the offer on a substantial number of rights being acquired. Accordingly, the existence of the rights may deter potential acquirers from making takeover proposals or tender offers. However, we believe the Rights Agreement helps ensure that our shareholders receive fair and equal treatment in the event of any proposed takeover and is intended to protect and enhance shareholder value, as well as assist our board of directors in realizing our strategic objectives. The foregoing description of the rights is qualified in its entirety by reference to the Rights Agreement. The Rights Agreement is incorporated by reference as an exhibit to the registration statement which this prospectus forms a part. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is Registrar and Transfer Company, Cranford, New Jersey. LISTING Our common stock is listed on the New York Stock Exchange under the symbol "TNL." 43 UNDERWRITERS Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation and Legg Mason Wood Walker, Incorporated are acting as representatives, have severally agreed to purchase, and we have agreed to sell to them, severally, the number of shares indicated below:
NUMBER OF NAME SHARES - ---- --------- Morgan Stanley & Co. Incorporated........................... Credit Suisse First Boston Corporation...................... Legg Mason Wood Walker, Incorporated........................ -------- Total............................................... ========
The underwriters are offering the shares of our common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of our common stock offered by this prospectus are subject to the approval of legal matters by their counsel and some other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters' over-allotment option described below. The underwriters initially propose to offer part of the shares of our common stock directly to the public at the public offering price listed on the cover page of this prospectus and part to a limited number of dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any underwriter may allow, and such dealers may re-allow, a concession not in excess of $ a share to other underwriters or to certain dealers. After the public offering of the shares of our common stock, the offering price and other selling terms may from time to time be varied by the representatives. We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 840,000 additional shares of our common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of our common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to specified conditions, to purchase about the same percentage of the additional shares of our common stock as the number listed next to the underwriter's name in the preceding table bears to the total number of shares of our common stock listed next to the names of all underwriters in the preceding table. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by us. These amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option.
PER SHARE TOTAL ------------------------------- ------------------------------- NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE -------------- -------------- -------------- -------------- Underwriting Discounts and Commissions paid by us........... $ $ $ $
Several of the underwriters and their affiliates have provided and will provide investment banking, transaction advisory and other financial services for us and our affiliates in the ordinary course of business for which they have received and will receive customary compensation. In particular, an affiliate of Legg Mason 44 Wood Walker, Incorporated has provided us transaction advisory services since 1996 in exchange for a monthly retainer of $5,000 and a success fee calculated as a percentage of the total value of the completed transaction. This percentage varies based upon the size of the transaction. Fees paid to Legg Mason Wood Walker, Incorporated for transaction advisory services were $234,000 and $67,000 in 2001 and 2000, respectively. In addition, an affiliate of Morgan Stanley & Co. Incorporated administered our employee stock purchase plan during 2000 and 2001. Fees paid by us for these services during 2001 were approximately $33,500 and were nominal during 2000. We believe these arrangements are on terms customary for these services. The underwriters have informed us that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of our common stock offered by them. We will apply to list the shares of common stock offered hereby on the New York Stock Exchange. We have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, we will not, during the period ending 90 days after the date of this prospectus: -- offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock, or -- enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our common stock, whether any transaction described above is to be settled by delivery of our common stock or such other securities, in cash or otherwise. The restrictions described in the above paragraph do not apply to: -- the sale of shares to the underwriters, or -- the issuance by us upon the exercise of employee stock options outstanding on the date of this prospectus of which the underwriters have been advised in writing and issuances under our rights plan, dividend reinvestment plan, restricted stock plan, employee stock purchase plan and board of directors stock plan. Our officers and directors have agreed that they will not, without, in each case, the prior written consent of Morgan Stanley & Co. Incorporated, for a period of 90 days after the date of this prospectus: -- offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or enter into a transaction that would have the same effect, -- enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash or otherwise, or -- publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement. In addition, the trustees of three related trusts, which held 2,566,500 shares of our common stock in the aggregate as of December 28, 2001, have agreed to these restrictions with respect to the shares beneficially owned by all of these trusts, except for 200,000 shares in the aggregate which may be sold or otherwise disposed of by these trusts without the prior written consent of Morgan Stanley & Co. Incorporated. The restrictions described in the above paragraphs relating to our officers, directors and the related trusts do not apply to: -- any shares of our common stock acquired in the open market, or -- a transfer of any shares of our common stock to a family member, a trust or as a bona fide gift, provided the transferee agrees to be bound in writing by these restrictions prior to such transfer. 45 In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is "covered" if the short position is no greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the over-allotment option. The underwriters may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. In addition, to cover over-allotments or to stabilize the price of our common stock, the underwriters may bid for, and purchase, shares of our common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering, if the syndicate repurchases previously distributed common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. A prospectus in electronic format may be made available on the Web sites maintained by one or more of the underwriters. The representatives of the underwriters may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distribution will be allocated by the representatives to underwriters that may make Internet distributions on the same basis as other allocations. We have agreed with the underwriters to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933, as amended. 46 LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for Technitrol by Stradley, Ronon, Stevens & Young, LLP, Philadelphia, Pennsylvania. Wilson Sonsini Goodrich & Rosati, Professional Corporation, New York, New York, will pass upon certain legal matters for the underwriters. EXPERTS The consolidated financial statements of Technitrol, Inc. as of December 28, 2001 and December 29, 2000, and for each of the years in the three year period ended December 28, 2001, have been included herein and in the registration statement in reliance on the report of KPMG LLP, independent accountants, and upon the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any document we file at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. You may also obtain our SEC filings from the SEC's website at http://www.sec.gov. We have filed with the SEC a registration statement on Form S-3 under the Securities Act with respect to the securities offered under this prospectus. This prospectus does not contain all of the information in the registration statement, parts of which we have omitted, as allowed under the rules and regulations of the SEC. You should refer to the registration statement for further information with respect to us and our securities. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete and, in each instance, we refer you to the copy of each contract or document filed as an exhibit of the registration statement. Copies of the registration statement, including exhibits, may be obtained from the SEC by the means described above. 47 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. Statements made in this prospectus as to the contents of any contract, agreement or other documents are not necessarily complete, and, in each instance, we refer you to a copy of such document filed as an exhibit to the registration statement or otherwise filed with the SEC. The information incorporated by reference is considered to be part of this prospectus. When we file information with the SEC in the future, that information will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings we will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, until we sell all of the common stock offered by this prospectus. a. Our Annual Report on Form 10-K for the fiscal year ended December 29, 2000 including portions of our definitive Proxy Statement for the 2001 Annual Meeting of Shareholders incorporated into the Form 10-K by reference, b. Our Quarterly Reports on Form 10-Q for the quarterly periods ended March 30, June 29 and September 28, 2001, c. Our Current Reports on Form 8-K filed with the SEC on May 30 and August 21, 2001 reporting under Item 5 and Item 2, respectively, regarding the acquisition of Excelsus Technologies, Inc., and d. Our Registration Statement on Form 8-A/A dated July 5, 2000 describing our common stock and our purchase rights, including any amendment or reports filed for the purpose of updating such description. You may request a copy of these filings, at no cost, by writing or telephoning us at: Technitrol, Inc. Attention: Secretary 1210 Northbrook Drive, Suite 385 Trevose, PA 19053 (215) 355-2900 48 TECHNITROL, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS PAGE - -------------------- ---- Independent Auditors' Report................................ F-2 Consolidated Balance Sheets as of December 29, 2000 and December 28, 2001......................................... F-3 Consolidated Statements of Earnings for the years ended December 31, 1999 and December 29, 2000 and December 28, 2001...................................................... F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1999 and December 29, 2000 and December 28, 2001...................................................... F-5 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1999 and December 29, 2000 and December 28, 2001................................ F-6 Notes to Consolidated Financial Statements.................. F-7
FINANCIAL STATEMENT SCHEDULE - ---------------------------- Schedule II -- Valuation and Qualifying Accounts............ F-25
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Technitrol, Inc.: We have audited the consolidated financial statements of Technitrol, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Technitrol, Inc. and subsidiaries as of December 29, 2000 and December 28, 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 28, 2001, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Philadelphia, Pennsylvania January 18, 2002 F-2 TECHNITROL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 29, DECEMBER 28, 2000 2001 ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS ------ Current assets: Cash and cash equivalents................................. $162,631 $142,267 Trade receivables, net.................................... 108,423 63,294 Inventories............................................... 86,001 62,404 Prepaid expenses and other current assets................. 11,679 18,785 -------- -------- Total current assets................................... 368,734 286,750 Property, plant and equipment............................... 173,739 170,665 Less accumulated depreciation............................. 81,341 87,613 -------- -------- Net property, plant and equipment...................... 92,398 83,052 Deferred income taxes....................................... 11,235 9,499 Excess of cost over net assets acquired and other intangibles, net.......................................... 47,064 128,512 Other assets................................................ 1,340 17,207 -------- -------- $520,771 $525,020 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Current installments of long-term debt.................... $ 151 $ 122 Accounts payable.......................................... 35,046 24,780 Accrued expenses.......................................... 103,140 72,591 -------- -------- Total current liabilities.............................. 138,337 97,493 Long-term liabilities: Long-term debt, excluding current installments............ 48,437 89,007 Other long-term liabilities............................... 9,567 9,289 Commitments and contingencies (Note 7) Shareholders' equity: Common stock: 175,000,000 shares authorized; 33,236,762 and 33,683,420 outstanding in 2000 and 2001, respectively; $.125 par value per share and additional paid-in capital........................................ 63,909 70,184 Retained earnings......................................... 266,132 264,055 Other..................................................... (5,611) (5,008) -------- -------- Total shareholders' equity............................. 324,430 329,231 -------- -------- $520,771 $525,020 ======== ========
See accompanying Notes to Consolidated Financial Statements. F-3 TECHNITROL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED -------------------------------------------- DECEMBER 31, DECEMBER 29, DECEMBER 28, 1999 2000 2001 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales...................................... $530,436 $664,378 $474,199 Cost of sales.................................. 358,553 409,856 359,681 -------- -------- -------- Gross profit................................. 171,883 254,522 114,518 Selling, general and administrative expenses... 110,694 131,113 98,837 Restructuring and unusual and infrequent items........................................ -- 3,305 13,594 -------- -------- -------- Operating profit............................. 61,189 120,104 2,087 Other income (expense): Interest income.............................. 1,882 6,341 6,401 Interest expense............................. (3,477) (3,482) (4,998) Other, net................................... (585) (49) 1,879 -------- -------- -------- (2,180) 2,810 3,282 -------- -------- -------- Earnings before income taxes................. 59,009 122,914 5,369 Income tax expense............................. 14,697 23,606 2,903 -------- -------- -------- Net earnings................................... $ 44,312 $ 99,308 $ 2,466 ======== ======== ======== Net earnings per share: Basic........................................ $ 1.38 $ 3.05 $ .07 ======== ======== ======== Diluted...................................... $ 1.36 $ 3.02 $ .07 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. F-4 TECHNITROL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED -------------------------------------------- DECEMBER 31, DECEMBER 29, DECEMBER 28, 1999 2000 2001 ------------ ------------ ------------ (IN THOUSANDS) Cash flows from operating activities: Net earnings........................................... $44,312 $ 99,308 $ 2,466 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........................ 19,411 22,378 26,553 Tax benefit from employee stock compensation......... 429 1,893 231 Amortization of stock incentive plan expense......... 2,327 6,990 1,219 Loss on impairment and sale of property, plant and equipment.......................................... 1,076 1,301 3,863 Deferred taxes....................................... 3,319 (4,239) 4,889 Restructuring and unusual and infrequent items....... -- 2,495 599 Inventory provisions................................. 4,483 8,129 20,295 Changes in assets and liabilities, net of effect of acquisitions and divestitures: Trade receivables.................................. (9,345) (31,527) 48,197 Inventories........................................ 1,262 (30,161) 8,437 Prepaids and other current assets.................. 775 1,462 (4,487) Accounts payable................................... 3,788 10,630 (14,348) Accrued expenses................................... (3,028) 21,321 (33,657) Other, net........................................... 443 3,808 (1,571) ------- -------- -------- Net cash provided by operating activities............ 69,252 113,788 62,686 ------- -------- -------- Cash flows from investing activities: Acquisitions, net of cash acquired..................... (15,277) (5,365) (115,533) Capital expenditures, exclusive of acquisitions........ (18,766) (29,976) (13,149) Proceeds from sale of property, plant and equipment.... 1,115 571 4,531 ------- -------- -------- Net cash used in investing activities................ (32,928) (34,770) (124,151) ------- -------- -------- Cash flows from financing activities: Principal payments on long-term debt................... (73,185) (36,243) (97,261) Long-term borrowings................................... 77,753 27,269 140,239 Payment of debt assumed in acquisition................. -- -- (3,944) Dividends paid......................................... (4,133) (4,430) (4,528) Exercise of stock options.............................. 5 220 17 Sale of stock through employee stock purchase plan..... 916 8,388 6,548 ------- -------- -------- Net cash (used in) provided by financing activities......................................... 1,356 (4,796) 41,071 ------- -------- -------- Net effect of exchange rate changes on cash.............. (82) 248 30 ------- -------- -------- Net increase in cash and cash equivalents................ 37,598 74,470 (20,364) Cash and cash equivalents at beginning of year........... 50,563 88,161 162,631 ------- -------- -------- Cash and cash equivalents at end of year................. $88,161 $162,631 $142,267 ======= ======== ========
See accompanying Notes to Consolidated Financial Statements. F-5 TECHNITROL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
OTHER COMMON STOCK ---------------------------- AND ACCUMULATED PAID-IN CAPITAL OTHER ---------------- RETAINED DEFERRED COMPREHENSIVE COMPREHENSIVE SHARES AMOUNT EARNINGS COMPENSATION INCOME INCOME ------ ------- -------- ------------ ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE AT JANUARY 1, 1999........ 16,170 $45,109 $131,227 $(1,792) $ 265 Stock options, awards and related compensation.................... 66 1,809 -- (609) -- Tax benefit of stock compensation.................... -- 429 -- -- -- Stock issued under employee stock purchase plan................... 30 916 -- -- -- Currency translation adjustments..................... -- -- -- -- (1,770) $(1,770) Net earnings...................... -- -- 44,312 -- -- 44,312 ------- Comprehensive income.............. -- -- -- -- -- $42,542 ======= Dividends declared ($.13125 per share).......................... -- -- (4,261) -- -- ------ ------- -------- ------- ------- BALANCE AT DECEMBER 31, 1999...... 16,266 $48,263 $171,278 $(2,401) $(1,505) Stock options, awards and related compensation.................... 88 5,365 -- (1,470) -- Tax benefit of stock compensation.................... -- 1,893 -- -- -- Stock issued under employee stock purchase plan................... 265 8,388 -- -- -- Currency translation adjustments..................... -- -- -- -- (235) $ (235) Net earnings...................... -- -- 99,308 -- -- 99,308 ------- Comprehensive income.............. -- -- -- -- -- $99,073 ======= Dividends declared ($.135 per share).......................... -- -- (4,454) -- -- Two-for-one stock split effective in November 2000................ 16,618 -- -- -- -- ------ ------- -------- ------- ------- BALANCE AT DECEMBER 29, 2000...... 33,237 $63,909 $266,132 $(3,871) $(1,740) Stock options, awards and related compensation.................... 48 (504) -- 1,441 -- Tax benefit of stock compensation.................... -- 231 -- -- -- Stock issued under employee stock purchase plan................... 398 6,548 -- -- -- Currency translation adjustments..................... -- -- -- -- (838) $ (838) Net earnings...................... -- -- 2,466 -- -- 2,466 ------- Comprehensive income.............. -- -- -- -- -- $ 1,628 ======= Dividends declared ($.135 per share).......................... -- -- (4,543) -- -- ------ ------- -------- ------- ------- BALANCE AT DECEMBER 28, 2001...... 33,683 $70,184 $264,055 $(2,430) $(2,578) ====== ======= ======== ======= =======
See accompanying Notes to Consolidated Financial Statements. F-6 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Technitrol, Inc. (the "Company") and all of its subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation. CASH AND CASH EQUIVALENTS Cash and cash equivalents include funds invested in a variety of liquid short-term investments with a maturity of three months or less. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Inventory that is fully reserved in the ordinary course of business is not written back up after a write-down. Inventory reserves are utilized when the actual inventory is physically disposed. The reserves are determined by comparing quantity on-hand to historical usage and forecasted demand. The Company's inventory reserves at December 29, 2000 and December 28, 2001 were $9.2 million and $23.5 million, respectively. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is based upon the estimated useful life of the assets on both the accelerated and the straight-line methods. The estimated useful lives of assets range from 5 to 30 years for buildings and improvements and from 3 to 10 years for machinery and equipment. Expenditures for maintenance and repairs are charged to operations as incurred, and major renewals and betterments are capitalized. Upon sale or retirement, the cost of the asset and related accumulated depreciation are removed from the balance sheet, and any resulting gains or losses are included in earnings. EXCESS OF COST OVER NET ASSETS AND OTHER INTANGIBLES Excess of cost over net assets acquired is amortized on a straight-line basis over 15 years. When events and circumstances so indicate, the recoverability of its carrying value is evaluated by determining whether its remaining balance can be recovered through future undiscounted cash flows from operations. Such events and circumstances include a sale of all or a significant part of the operations associated with the excess of cost over net assets acquired, or a significant decline in the operating performance of the net assets. If an evaluation indicates that the carrying value cannot be recovered through future operating undiscounted cash flows, an impairment charge will be recorded by discounting the future operating cash flows using the implied cost of capital for that business segment and comparing the resulting discounted cash flow to the carrying value. The Company has approximately $47.1 million of goodwill at December 29, 2000 and approximately $80.3 million of goodwill and $48.2 million of other intangibles, including $40.0 million of tradenames, on its balance sheet as of December 28, 2001. See additional discussion in Note 2 Acquisitions. Acquisitions consummated after July 1, 2001 were accounted for by the transition rules of SFAS 141, and goodwill resulting from such transactions have not been subjected to amortization. REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE Revenue is recognized upon shipment of product and passage of title without right of return, after all performance factors have been met. The Company is not subject to any significant customer acceptance provisions. Product returns are covered by reserves based on historical experience and Financial Accounting F-7 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Standard No. 48, "Revenue Recognition When Right of Return Exists." The Company's accounts receivable reserves at December 29, 2000 and December 28, 2001 were $1.9 million and $2.6 million, respectively. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Note 11 presents proforma results of operations as if Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (FAS 123), had been used to account for stock-based compensation plans. FOREIGN CURRENCY TRANSLATION Certain foreign subsidiaries of the Company use the U.S. dollar as the functional currency and others use a local currency. For subsidiaries using the U.S. dollar as the functional currency, non-U.S. dollar monetary assets and liabilities are remeasured at year-end exchange rates while non-monetary items are remeasured at historical rates. Income and expense accounts are remeasured at the average rates in effect during the year, except for depreciation that is remeasured at historical rates. Gains or losses from changes in exchange rates are recognized in earnings in the year of occurrence. For entities using a local currency as the functional currency, net assets are translated at year-end rates while income and expense accounts are translated at average exchange rates. Adjustments resulting from these translations are reflected directly in shareholders' equity. FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS The carrying value of cash and cash equivalents, accounts receivable, short-term borrowings and accounts payable are a reasonable estimate of their fair value due to the short-term nature of these instruments. The carrying value of long-term debt approximates its fair value after taking into consideration current rates offered to the Company for similar debt instruments of comparable maturities. The fair values of financial instruments have been determined through information obtained from quoted market sources and management estimates. The Company does not hold or issue financial instruments or derivative financial instruments for trading purposes. The Company is exposed to market risk from changes in interest rates, foreign currency exchange rates and precious metal prices. To mitigate the risk from these changes, the Company periodically enters into hedging transactions which have been authorized pursuant to the Company's policies and procedures. In accordance with SFAS 133, gains and losses related to qualified hedges of firm commitments and anticipated transactions are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. All other forward exchange and option contracts are marked-to-market and unrealized gains and losses are included in current period net income. At December 31, 1999, the Company did not have any derivative financial instruments outstanding, other than to sell forward approximately $1.2 million of precious metal purchased as part of the acquisition of MEC Betras Italia S.r.l. on December 22, 1999. At December 29, 2000, the Company had a foreign exchange contract in place to sell forward $3.2 million of U.S. dollars for French francs, in connection with the purchase of the electrical contacts business of Engelhard-CLAL on January 4, 2001. At December 28, 2001, the Company has five foreign exchange contracts in place to sell forward approximately 44.2 million of euro in connection with hedging the repayment of inter-segment loans. PRECIOUS METAL CONSIGNMENT-TYPE LEASES The Company has custody of inventories under consignment-type leases from suppliers ($40.8 million at December 29, 2000 and $39.6 million at December 28, 2001). The Company has four consignment-type leases in place for sourcing all precious metals. The leases are operating leases and the related inventory and F-8 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) liability are not recorded on its balance sheet. The leases are generally one-year in duration and can be extended with annual renewals. Either party can terminate the lease agreements with 30 days written notice. The primary covenant in each of the agreements is a prohibition against the Company creating security interests in the consigned metals. Included in interest expense for the year ended December 31, 1999 are consignment fees of $1.4 million. These interest costs were also $1.1 million in 2000 and 2001. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. RECLASSIFICATIONS Certain amounts in the prior-year financial statements have been reclassified to confirm with the current-year presentation. (2) ACQUISITIONS Tool and Die facility in Estonia from AMP: In January of 2000, the Company completed the acquisition of a tool and die design and manufacturing operation near Tallinn, Estonia, from AMP, a division of Tyco Electronics Corporation. This business was integrated into AMI Doduco. The purchase price was not material to the Company's consolidated financial position. EWC, Inc: In October 2000, the Company purchased certain assets of EWC, Inc. EWC manufactured magnetic components primarily for the defense and aerospace industries. This business was integrated into the Specialty Components Division of Pulse. The purchase price was not material to the Company's consolidated financial position. Engelhard-CLAL: In January 2001, the Company acquired the electrical contacts business of Engelhard-CLAL. These operations are based in France with additional operations in Spain and the United Kingdom. Engelhard-CLAL manufactured electrical contacts, wire and strip contact materials and related products primarily for the European electrical equipment market. This business was integrated into AMI Doduco. The purchase price was not material to the Company's consolidated financial position. Grupo ECM: In March 2001, the Company acquired Electro Componentes Mexicana, S.A. de C.V. and affiliates based in Mexico City. These operations are referred to as Grupo ECM. Grupo ECM manufactured and marketed inductive components primarily for automotive applications. This business was integrated into Pulse. The purchase price was not material to the Company's consolidated financial position. Full Rise Electronics Co. Ltd.: In April 2001, the Company made a minority investment in the common stock of Full Rise Electronics Co. Ltd. ("FRE") which is accounted for by the cost-basis method of accounting. FRE is based in the Republic of China (Taiwan) and manufactures connector products including single and multiple port jacks. This investment was made by Pulse and the Company has an option to purchase additional shares of common stock in FRE in the future. Excelsus Technologies, Inc.: In August 2001, the Company acquired all of the capital stock of Excelsus Technologies, Inc. ("Excelsus") based in Carlsbad, California. Excelsus produced customer-premises digital subscriber line filters and other broadband accessories. The acquisition was accounted for by the purchase method of accounting. The preliminary purchase price was approximately $85.9 million, net of $4.8 million of cash acquired and a preliminary purchase price adjustment of $2.6 million. The fair value of net assets F-9 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) acquired approximated $18.2 million. Based on the fair value of the assets acquired, the preliminary allocation of the unadjusted purchase price includes $40.0 million for trade names, $27.0 million for goodwill and $8.0 million for technology. The only intangible subject to amortization is the $8.0 million of technology, which is estimated to have a 5-year life. The purchase price is subject to adjustment for the net worth of Excelsus at the date of closing and the allocation of the purchase price is subject to adjustment as details of the transaction are finalized. A significant portion of the purchase price is being maintained in an escrow account. Included in the assets acquired is a $6.3 million tax receivable, generated by the acceleration and settlement of Excelsus stock options at the time of closing. The Company filed income tax returns for the period ending on the closing date, and received the full amount of the tax receivable during the fourth quarter of 2001. In order to fund the purchase price, the Company used approximately $19.0 million of cash on-hand and borrowed approximately $74.0 million under its existing credit facility with a syndicate of commercial banks. Excelsus was integrated into Pulse. Prior to the acquisition, Excelsus recorded revenues of approximately $40.0 million in 2000. (3) FINANCIAL STATEMENT DETAILS The following provides details for certain financial statement captions at December 29, 2000 and December 28, 2001 (in thousands):
2000 2001 -------- -------- Inventories: Finished goods............................................ $ 28,710 $ 22,159 Work in progress.......................................... 15,907 11,723 Raw materials and supplies................................ 41,384 28,522 -------- -------- $ 86,001 $ 62,404 ======== ======== Property, plant and equipment, at cost: Land...................................................... $ 4,081 $ 3,287 Buildings and improvements................................ 32,362 30,287 Machinery and equipment................................... 137,296 137,091 -------- -------- $173,739 $170,665 ======== ======== Accrued expenses: Income taxes payable...................................... $ 37,214 $ 26,210 Dividends payable......................................... 1,122 1,137 Accrued compensation...................................... 26,746 10,158 Other accrued expenses.................................... 38,058 35,086 -------- -------- $103,140 $ 72,591 ======== ========
F-10 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) LONG-TERM DEBT At December 29, 2000 and December 28, 2001, long-term debt was as follows (in thousands):
2000 2001 ------- ------- Bank Loans Variable-rate, (base rate plus 0.85% to 1.425% depending on debt to EBITDA ratio; base rate is LIBOR or prime rate for U.S. dollars, Euro-LIBOR for euros and a rate approximating Sterling LIBOR for British pounds) multi-currency revolving credit facility with $225.0 million maximum draw, due June 20, 2004 (2.91% weighted average rate at December 28, 2001)..................... $ -- $75,000 Variable-rate (EURIBOR plus 0.50%), Eurocurrency revolving credit facility with $20.0 million maximum draw (5.46% rate at December 29, 2000)............................. 14,018 -- Variable-rate (EURIBOR plus 0.625%), multi-currency bank loan facility with $40.0 million maximum draw (5.625% rate at December 29, 2000)............................. 17,827 -- Fixed-rate (5.57% and 4.85%), unsecured debt in Germany (denominated in Deutsche marks) due June 26, 2003...... 9,636 9,038 Fixed-rate (5.65%), unsecured debt in Germany (denominated in Deutsche marks) due August 2, 2009.................. 4,818 4,519 Variable-rate (EURIBOR plus 0.625%), Eurocurrency offering basis credit facility with $5.0 million maximum draw (5.625% rate at December 29, 2000)..................... 1,413 -- ------- ------- Total bank loans....................................... 47,712 88,557 Mortgage Notes, secured by mortgages on land, buildings, and certain equipment: 8.20%--10.32% mortgage notes, due in monthly installments until 2007............................................. 876 572 ------- ------- Total long-term debt................................... 48,588 89,129 Less current installments................................. 151 122 ------- ------- Long-term debt excluding current installments............. $48,437 $89,007 ======= =======
All previous credit facilities and lines of credit, excluding fixed term loans, were replaced as of June 20, 2001 under a new three-year revolving credit agreement providing for $225.0 million of credit capacity. The credit facility consists of: -- a U.S. dollar-based revolving line of credit in the principal amount of up to $225.0 million; -- a British pounds sterling-based or euro-based revolving line of credit in the principal amount of up to the U.S. dollar equivalent of $100.0 million; and -- a multicurrency facility providing for the issuance of letters of credit in an aggregate amount not to exceed the U.S. dollar equivalent of $10.0 million. The amounts outstanding under the credit facility in total may not exceed $225.0 million. The Company pays a facility fee irrespective of whether there are outstanding borrowings or not, which ranges from 0.275% to 0.450% of the total commitment, depending on our ratio of debt to earnings before interest, taxes, depreciation and amortization, ("EBITDA"). The interest rate for each currency's borrowing will be a combination of the base rate for that currency plus a credit margin spread. The base rate is different for each currency: LIBOR or prime rate for U.S. dollars, Euro-LIBOR for euros, and a rate approximating sterling LIBOR for British pounds. The credit margin spread is the same for each currency and is 0.850% to 1.425% depending on debt to EBITDA ratio. Each of the Company's domestic subsidiaries with net worth equal to or greater than $5 million has agreed to guarantee all obligations incurred under the credit facility. F-11 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's German indirect subsidiary, AMI Doduco GmbH, has obligations outstanding under two term loan agreements. The first is with Baden-Wurttembergische Bank for the borrowing of two loans, each in the amount of 10 million Deutsche marks, both due in June 2003. The second is with Sparkasse Pforzheim, for the borrowing of 10 million Deutsche marks, and is due in August 2009. The Company and several of its subsidiaries have guaranteed the obligations arising under these term loan agreements. Principal payments due within the next five years, based on terms of the Company's debt arrangements, are as follows (in thousands): 2002..................................................... $ 122 2003..................................................... 9,154 2004..................................................... 75,110 2005..................................................... 85 2006..................................................... 95 Thereafter............................................... 4,563 ------- $89,129 =======
All outstanding borrowings under the credit agreement have been classified as non-current because the Company has the ability and the intent to refinance these obligations on a long-term basis. The credit agreement contains certain covenants requiring maintenance of minimum net worth, maximum debt to EBITDA ratio, minimum interest expense coverage, capital expenditure limits and other customary and normal provisions. The Company is in compliance with all such covenants. (5) RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES Research, development and engineering expenses ("RD&E") are included in selling, general and administrative expenses and were $19.6 million, $20.2 million and $20.2 million in 1999, 2000 and 2001, respectively, for continuing operations. RD&E includes costs associated with new product development, product and process improvement, engineering follow-through during early stages of production, design of tools and dies, and the adaptation of existing technology to specific situations and customer requirements. The research and development component of RD&E, which generally includes only those costs associated with new technology, new products or significant changes to current products or processes, was $12.8 million, $14.4 million and $14.1 million in 1999, 2000 and 2001, respectively. (6) INCOME TAXES Earnings (loss) before income taxes were as follows (in thousands):
1999 2000 2001 ------- -------- ------- Domestic............................................. $ 934 $ (5,849) $(5,235) Non-U.S. ............................................ 58,075 128,763 10,604 ------- -------- ------- Total........................................... $59,009 $122,914 $ 5,369 ======= ======== =======
F-12 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income tax (benefit) expense was as follows (in thousands):
1999 2000 2001 ------- ------- ------- Current: Federal............................................. $ 736 $ 3,382 $(1,174) State and local..................................... 858 458 1,781 Non-U.S. ........................................... 9,784 24,005 2,614 ------- ------- ------- 11,378 27,845 3,221 Deferred tax (benefit) expense........................ 3,319 (4,239) (318) ------- ------- ------- $14,697 $23,606 $ 2,903 ======= ======= =======
Amounts credited to additional paid-in capital include the tax benefit of certain components of employee compensation related to the Company's common stock. Such items include dividends paid on restricted stock, the change in value from the award date to the release date of restricted stock which was released during the period. A reconciliation of the statutory federal income tax rate with the effective income tax rate follows:
1999 2000 2001 ---- ---- ---- Statutory federal income tax rate........................... 35% 35% 35% Increase (decrease) resulting from: Tax-exempt earnings of subsidiary in Puerto Rico.......... (1) (1) (3) State and local income taxes, net of federal tax effect... 1 1 21 Non-deductible expenses and other foreign income subject to U.S. income tax..................................... 3 3 35 Foreign................................................... (14) (19) (13) Other, net................................................ 1 -- (21) --- --- --- Effective tax rate.......................................... 25% 19% 54% === === ===
The effect on the effective tax rate of non-deductible expenses is due to the nature and timing of the restructuring and other unusual and infrequent items. The effect on the effective tax rate of other, net is due to alternative minimum tax and research and development tax credits. F-13 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred tax assets and liabilities included the following (in thousands):
2000 2001 ------- ------- Assets: Inventories............................................... $ 896 $ 1,982 Plant and equipment....................................... 1,194 996 Vacation pay and other compensation....................... 1,766 1,317 Pension expense........................................... 844 743 Stock awards.............................................. 1,806 1,592 Accrued liabilities....................................... 5,519 5,029 Net operating losses...................................... 3,729 5,715 Capital losses carryover.................................. 6,582 6,582 Other..................................................... 1,951 2,121 ------- ------- Total deferred tax assets.............................. 24,287 26,077 Valuation allowance.................................... (6,582) (7,854) ------- ------- Net deferred tax assets................................ 17,705 18,223 Liabilities: Deferred taxes on foreign operations and acquired intangibles............................................ 2,600 2,800 ------- ------- Total deferred tax liabilities......................... 2,600 2,800 ------- ------- Net deferred tax assets................................ 15,105 15,423 Less current deferred tax assets....................... 3,870 5,924 ------- ------- Long-term deferred income taxes........................ $11,235 $ 9,499 ======= =======
Based on the Company's history of taxable income and its projection of future earnings, management believes that it is more likely than not that sufficient taxable income will be generated in the foreseeable future to realize the net deferred tax assets. The Company has not provided for U.S. federal income and foreign withholding taxes on approximately $294.0 million of non-U.S. subsidiaries' undistributed earnings (as calculated for income tax purposes) as of December 28, 2001. Such earnings include pre-acquisition earnings of foreign entities acquired through stock purchases, and are intended to be reinvested outside of the U.S. indefinitely. It is not practical to estimate the amount of unrecognized deferred taxes on these undistributed earnings. Where excess cash has accumulated in the Company's non-U.S. subsidiaries and it is advantageous for tax reasons, subsidiary earnings may be remitted. (7) COMMITMENTS AND CONTINGENCIES The Company conducts a portion of its operations from leased premises and also leases certain equipment under operating leases. Total rental expense amounts for the years ended December 31, 1999, December 29, 2000 and December 28, 2001 were $5.4 million, $5.9 million and $7.4 million, respectively. The aggregate F-14 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) minimum rental commitments under non-cancelable leases in effect at December 28, 2001 were as follows (in thousands):
YEAR ENDING - ------ 2002....................................................... $ 8,819 2003....................................................... 6,662 2004....................................................... 4,854 2005....................................................... 3,811 2006....................................................... 1,733 Thereafter................................................. 4,891 ------- $30,770 =======
The Company is involved in several legal actions relating to waste disposal sites. The Company's involvement in these matters has generally arisen from the alleged disposal by licensed waste haulers of small amounts of waste material many years ago. In addition, as a result of the acquisition of GTI, the Company is involved in studying and undertaking certain remedial actions with respect to groundwater pollution and soil contamination conditions at a facility in Leesburg, Indiana. The Company anticipates making additional environmental expenditures in future years to continue its environmental studies, analysis and remediation activities. The Company is also subject to various lawsuits, claims and proceedings which arise in the ordinary course of its business. The Company does not believe that the outcome of any of these lawsuits will have a material adverse effect on its financial results. The Company accrues costs associated with environmental and legal matters when they become probable and reasonably estimable. Accruals are established based on the estimated undiscounted cash flows to settle the obligations and are not reduced by any potential recoveries from insurance or other indemnification claims. Management believes that any ultimate liability with respect to these actions in excess of amounts provided will not materially affect the Company's operations or consolidated financial position, liquidity or operating results. (8) SHAREHOLDERS' EQUITY On October 19, 2000, the Company's Board of Directors approved a two-for-one split of the Company's common stock in the form of a 100% common stock dividend for shareholders of record as of November 6, 2000, payable November 27, 2000. A total of 16,618,381 shares were issued in connection with the split. The stated par value of each share was not changed from $.125. Relevant share and per share amounts have been restated to retroactively reflect the stock split. The retained earnings of the Company at December 28, 2001 include approximately $10.0 million which has been restricted in accordance with the laws of the People's Republic of China (PRC). This amount, which is based on the earnings of the Company's subsidiaries in the PRC, may not be available for distribution to the U.S. parent company or its shareholders but is not required to be held in cash. The Company has a Shareholder Rights Plan. The Rights are currently not exercisable, and automatically trade with the Company's common shares. However, after a person or group has acquired 15% or more of the common shares, the Rights will become exercisable, and separate certificates representing the Rights will be distributed. In the event that any person or group acquires 15% of the common shares, each holder of two Rights (other than the Rights of the acquiring person) will have the right to receive, for $135, that number of common shares having a market value equal to two times the exercise price of the Rights. Alternatively, in the F-15 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) event that, at any time following the date in which a person or group acquires ownership of 15% or more of the common shares, the Company is acquired in a merger or other business combination transaction, or 50% or more of its consolidated assets or earning power is sold, each holder of two Rights (other than the Rights of such acquiring person or group) will thereafter have the right to receive, upon exercise, that number of shares of common stock of the acquiring entity having a then market value equal to two times the exercise price of the Rights. The Rights may be redeemed by the Company at a price of $.005 per Right at any time prior to becoming exercisable. Rights that are not redeemed or exercised will expire on September 9, 2006. Effective August 1, 2001, the Company adopted a new qualified, non-compensatory employee stock purchase plan that provides substantially all employees an opportunity to purchase common stock of the Company. The purchase price is equal to 85% of the fair value of the common stock on either the first day of the offering period or the last day of the purchase period, whichever is lower. The offering periods and purchase periods are defined by the plan, but are each generally six months in duration. In connection with this stock purchase plan, 1,000,000 shares of common stock are reserved for issuance under the plan. In 1999, 2000 and 2001, employees purchased approximately 60,000, 530,000 and 398,000 shares, respectively, under a predecessor plan. (9) EARNINGS PER SHARE Basic earnings per share are calculated by dividing earnings by the weighted average number of common shares outstanding during the year (excluding restricted shares which are considered to be contingently issuable). The Company has restricted shares outstanding of 368,000, 386,000, and 361,000 as of December 31, 1999, December 29, 2000 and December 28, 2001, respectively, which generally vest over a three year term. For calculating diluted earnings per share, common share equivalents and restricted stock outstanding are added to the weighted average number of common shares outstanding. Common share equivalents result from outstanding options to purchase common stock as calculated using the treasury stock method. Such amounts were approximately 36,000 in 1999, 5,500 in 2000 and 24,000 in 2001. Relevant share amounts and earnings per share have been restated to reflect a two-for-one stock split effective on November 27, 2000. Earnings per share calculations are as follows (in thousands, except per share amounts):
1999 2000 2001 ------- ------- ------- Net income.................................................. $44,312 $99,308 $ 2,466 Basic earnings per share: Shares.................................................... 32,092 32,510 33,202 Per share amount.......................................... $ 1.38 $ 3.05 $ .07 Diluted earnings per share: Shares.................................................... 32,492 32,859 33,566 Per share amount.......................................... $ 1.36 $ 3.02 $ .07
(10) EMPLOYEE BENEFIT PLANS The Company and certain of its subsidiaries maintain defined benefit pension plans and make contributions to multi-employer plans covering certain union employees. Certain non-U.S. subsidiaries have varying types of retirement plans providing benefits for substantially all of their employees. Pension (benefit) expense was as follows (in thousands):
1999 2000 2001 ----- ---- ----- Principal defined benefit plans............................. $(982) $149 $(395) Multi-employer and other employee benefit plans............. 295 490 221 ----- ---- ----- $(687) $639 $(174) ===== ==== =====
F-16 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The expense for the principal defined benefit pension plans include the following components (in thousands):
1999 2000 2001 ------ ------ ------ Service cost--benefits earned during the period............. $1,180 $1,309 $1,192 Interest cost on projected benefit obligation............... 1,399 1,566 1,667 Expected actual return on plan assets....................... (2,256) (2,430) (2,818) Curtailment gain............................................ (664) -- -- Net amortization............................................ (641) (296) (436) ------ ------ ------ Net periodic pension (benefit) cost....................... $ (982) $ 149 $ (395) ====== ====== ======
The financial status of the principal defined benefit plans at December 29, 2000 and December 28, 2001, was as follows (in thousands):
2000 2001 ------- ------- Change in benefit obligation: Benefit obligation at beginning of year................... $20,989 $24,397 Service cost........................................... 1,190 1,192 Interest cost.......................................... 1,566 1,667 Actuarial gain......................................... (656) 547 Plans not previously aggregated........................ 2,109 -- Benefits paid.......................................... (801) (1,387) ------- ------- Benefit obligation at end of year......................... 24,397 26,416 ------- ------- Change in plan assets: Fair value of plan assets at beginning of year............ 26,548 31,689 Actual return on plan assets........................... 5,082 (1,568) Employer contributions................................. -- -- Plans not previously aggregated........................ 852 -- Benefits paid.......................................... (793) (1,387) ------- ------- Fair value of plan assets at end of year.................. 31,689 28,734 ------- ------- Funded status............................................. 7,292 2,318 Unrecognized: Net gains.............................................. (11,491) (4,625) Prior service cost..................................... 633 990 Intangible asset....................................... -- (407) Net transition obligation.............................. 62 72 ------- ------- Accrued pension costs at the end of the year................ $(3,504) $(1,652) ======= =======
Benefits are based on years of service and average final compensation. For U.S. plans, the Company funds, annually, at least the minimum amount required by the Employee Retirement Income Security Act of 1974. Depending on the investment performance of plan assets and other factors, the funding amount may be zero. Plan assets consist principally of short-term investments and listed bonds and stocks. Assumptions used to develop data for 2001 and 2000 were as follows: Discount rate............................................... 7.3% Annual compensation increases............................... 4.8% Expected long-term rates of return on plan assets........... 9.0%
F-17 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company maintains defined contribution 401(k) plans covering substantially all U.S. employees not affected by certain collective bargaining agreements. Under the primary 401(k) plan, the Company contributed a matching amount equal to $1.00 for each $1.00 of the participant's contribution not in excess of 4% of the participant's annual wages. The total contribution expense under the 401(k) plans for employees of continuing operations was $681,000, $1,529,000 and $1,469,000 in 1999, 2000 and 2001, respectively. The Company does not provide any significant post-retirement benefits other than the pension plans and 401(k) plans described above. (11) STOCK-BASED COMPENSATION The Company has an incentive compensation plan for employees of the Company and its subsidiaries. One component of this plan grants the recipient the right of ownership of Technitrol, Inc. common stock, conditional on the achievement of performance objectives and/or continued employment with the Company. A summary of the shares under the incentive compensation plan is as follows:
AVAILABLE TO BE GRANTED ------------ Shares authorized........................................ 4,900,000 Awarded during years prior to 2001, net of cancellations.......................................... (2,015,874) ---------- Balance at December 29, 2000............................. 2,884,126 Awarded during 2001, net of cancellations................ (39,020) ---------- Balance available at December 28, 2001................... 2,845,106 ==========
During the years ended December 31, 1999, December 29, 2000 and December 28, 2001, the Company issued to employees, net of cancellations, incentive compensation shares having an approximate fair value at date of issue of $1,683,000, $2,598,000 and $1,055,268, respectively. The fair value of the incentive compensation shares are based on fair market price of the stock at the award date and recorded as deferred compensation. Compensation is recognized over the vesting period which is generally three years. Shares are held by the Company until the continued employment requirement and/or performance criteria have been attained. For shares subject to continued employment requirements, the market value of the shares at the date of grant is charged to expense during the vesting period on a straight-line basis. For shares subject to performance criteria, the expense varies with the market value of the shares until the performance criteria are met or are deemed to be unachievable. Cash awards, which accompany shares released under the Incentive Compensation Plan and are intended to assist recipients with their resulting personal tax liability, are based on the market value of the shares when restrictions lapse. Cash awards are accrued over the restriction period, and the related expense is variable based on the market value of the shares. Amounts charged to expense as a result of the Incentive Compensation Plan and related expenses were $2,327,000 in 1999, $6,990,000 in 2000 and $1,219,000 in 2001. A substantial portion of the shares granted are subject to variable accounting, whereby the related compensation expense is adjusted to reflect the impact of market price of the underlying shares awarded. The shares and expense associated with variable accounting were 40,000 and $209,000 in 1999, 112,900 and $3,440,000 in 2000, and 35,400 and $206,000 in 2001, respectively. The Company also has a stock award plan for non-employee directors. The Board of Directors Stock Plan was approved in 1998 to assist the Company in attracting and retaining highly qualified persons to serve on the Company's Board of Directors. Under the terms of the plan, 60,000 shares of the Company's common stock are available for grant. On an annual basis, shares amounting to a dollar value predetermined by the plan are issued to non-employee directors and recorded as an expense at issuance. In 1999, 2000 and 2001 10,848, 5,096 and 3,448 shares, respectively, (including those deferred at the directors' election) were issued under the plan. A total of 38,816 shares remain available for issuance under the plan. F-18 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In connection with the 1995 acquisition of Pulse Engineering, options which had been granted for the purchase of Pulse common shares were assumed by the Company and converted into options to purchase Technitrol common stock. At December 28, 2001, no options remained outstanding. No additional options are expected to be granted under the assumed plans. In February of 2001, the executive compensation committee of the Company adopted a stock option plan. All employees of the Company and designated subsidiaries are eligible to participate in the stock option plan. Except as limited by the terms of the option plan, the committee has discretion to select the persons to receive options and to determine the terms and conditions of the option, including the number of shares underlying the option, the exercise price, the vesting schedule and term. The options are granted at no cost to the employee and cannot be granted with an exercise price less than the fair market value at the date of grant. The options granted in 2001 vest equally over four years and expire in seven years. During the year ended December 28, 2001 a total of 232,700 shares, net of cancellations, were awarded to employees at a weighted average strike price of $21.86 per share. None of the shares were vested as of December 28, 2001. As permitted by the provisions of FAS 123, the Company applies Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based employee compensation plans. Accordingly, no compensation cost has been recognized for the Company's employee stock incentive plans. If compensation cost for the Company's stock option plan and employee stock purchase plan have been determined based on the fair value as required by FAS 123, the Company's pro forma net income (loss) and earnings (loss) per basic and diluted share would have been $78.2 million, $2.41 and $2.38, respectively for 2000 and $(4.6) million, $(.14) and $(.14), respectively, for 2001. (12) RESTRUCTURING AND UNUSUAL AND INFREQUENT ITEMS In the quarter ended March 31, 2000, AMI Doduco recorded a $5.5 million provision for restructuring initiatives due to a reduction in employment levels by approximately 120 people, primarily in Germany. The Company provided $3.7 million for employee severance and related payments, $0.9 million related to the impairment of certain assets and $0.9 million for other exit costs. Offsetting these costs was a gain of $1.4 million related to the sale of a non-strategic European product line and a $0.8 million gain related to an insurance settlement. As of December 29, 2000, the balance outstanding was $2.5 million. During the second quarter of 2001, the Company announced the closure of a Pulse production facility in Thailand. The Company also announced the closure of a Pulse production facility in Malaysia in the third quarter of 2001. The production at these two facilities was transferred to other Pulse facilities in Asia. The Company provided reserves of $3.6 million for these plant closings, comprised of $2.5 million for severance and related payments and $1.1 million for other exit costs. The majority of this accrual will be utilized by the end of the first quarter of 2002. The Company also adopted other restructuring plans during 2001. In this regard, employee severance provisions of $6.4 million were recorded during 2001. Approximately 3,500 manufacturing personnel primarily in Asia, and approximately 200 support personnel in North America and Europe were terminated. Approximately 75% of all of the employee severance and related payments in connection with these actions were completed as of December 28, 2001. Approximately $2.3 million of the provision remains as of December 28, 2001 for severance payments and related expenses to be paid during 2002. An additional $0.7 million remains accrued at December 28, 2001 for other exit costs primarily in Thailand and Malaysia. Termination costs for employees at our Thailand and Malaysian facilities have been included in the separate provisions for exiting those facilities. In addition to these terminations, headcount was reduced by approximately 12,300 additional personnel, net of new hires, during fiscal 2001 through voluntary employee attrition and involuntary workforce reductions, primarily at manufacturing facilities in the PRC where severance payments are not necessary. Accordingly, on a consolidated basis, the Company's employee base dropped from approximately 30,600 as of December 29, 2000 to approximately 14,800 as of December 28, 2001. F-19 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company recorded pre-tax inventory provisions in cost of sales of $20.3 million for the year ended December 28, 2001. These provisions resulted from production capacity reductions. In addition, a charge of $3.5 million was recorded during the third quarter of 2001 to write down the value of certain Pulse fixed assets to their disposal value. The assets are Asian-based production equipment that became idle in 2001 due to the contraction in Pulse's business. The assets have been marketed through the liquidation market, and the majority has either been sold for its residual value or scrapped. The remaining cost basis of the assets has been reclassified from fixed assets to assets held for sale in the balance sheet as of December 28, 2001. Total restructuring and unusual and infrequent items for the year ended December 31, 2001 includes $3.6 million related to the Thailand and Malaysia plant closings, $6.4 million for other restructuring plans and $3.5 million for the write down of Pulse fixed assets. Approximately $0.5 million for AMI Doduco restructuring actions is included in the aggregate charge of $6.4 million noted above. The capital-intensity of AMI Doduco makes quick changes in its cost structure more challenging than at Pulse. As a result of its core business focus on both economic and operating profit, the Company will continue to aggressively size both Pulse and AMI Doduco so that costs are minimized during market downturns, while they plan for the recovery in demand and pursue additional growth opportunities. The Company may adopt additional cost reduction actions during 2002, depending on the timing and extent of a recovery in Pulse's markets and the economy in general. If additional actions are undertaken, the amounts will depend on specific actions taken to reduce manufacturing capacity and improve efficiency. The Company's restructuring charges and unusual and infrequent items are summarized on a year-to-date basis for 2001 as follows:
RESTRUCTURING PROVISION (IN MILLIONS:) AMI DODUCO PULSE TOTAL - -------------------------------------- ---------- ----- ----- Balance accrued at December 29, 2000............. $ 2.5 $ -- $ 2.5 Accrued during the year ended December 28, 2001........................................... 0.5 13.1 13.6 Severance and other cash payments................ (2.2) (7.2) (9.4) Non-cash asset disposals......................... (0.2) (3.5) (3.7) ----- ----- ----- Balance accrued at December 28, 2001............. $ 0.6 $2.4 $ 3.0 ===== ===== =====
(13) SUPPLEMENTARY INFORMATION The following amounts were charged directly to costs and expenses (in thousands):
1999 2000 2001 ------- ------- ------- Depreciation.......................................... $15,678 $18,548 $21,177 Amortization of intangible assets..................... 3,733 3,830 5,376 Advertising........................................... 780 662 552 Repairs and maintenance............................... 6,480 10,382 6,668 Bad debt expense...................................... 116 1,063 173 Cash payments made: Income taxes........................................ $17,604 $14,218 $11,736 Interest............................................ 3,528 3,530 5,470
Accumulated other comprehensive income as disclosed in the Consolidated Statements of Changes in Shareholders' Equity consists principally of foreign currency translation items. F-20 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (14) SEGMENT AND GEOGRAPHICAL INFORMATION The Company operates its business in two segments: the Pulse segment, which operates under the name Pulse, and the AMI Doduco segment, which operates under the name AMI Doduco. We refer to these segments as ECS or Pulse, and ECPS or AMI Doduco, respectively. Pulse is managed by a President who reports to our Chief Executive Officer. AMI Doduco is managed by co-Presidents, each of whom reports to our Chief Executive Officer. Pulse designs and manufactures a wide variety of highly-customized passive magnetics-based electronic components. These components manage and regulate electronic signals and power for use in a variety of devices by filtering out radio frequency interference and adjusting and ensuring proper current and voltage. These products are often referred to as chokes, inductors, filters and transformers. Pulse sells its products to multinational original equipment manufacturers, contract manufacturers and distributors. AMI Doduco is the only global integrated producer of AMI Doduco that range from contact materials to completed contact subassemblies. Contact products complete or interrupt electrical circuits in virtually every electrical device. AMI Doduco provides its customers with a broad array of highly engineered products and tools designed to meet unique customer needs. Amounts are in thousands:
1999 2000 2001 -------- -------- -------- Net sales from continuing operations Pulse.............................................. $307,351 $438,770 $253,281 AMI Doduco......................................... 223,085 225,608 220,918 -------- -------- -------- Total........................................... $530,436 $664,378 $474,199 ======== ======== ======== Operating profit before income taxes Pulse.............................................. $ 49,893 $110,892 $ 9,381 Pulse restructuring and infrequent and unusual items........................................... -- -- (13,053) AMI Doduco......................................... 11,296 12,517 6,300 AMI Doduco restructuring and infrequent and unusual items........................................... -- (3,305) (541) -------- -------- -------- Total operating profit..................... 61,189 120,104 2,087 Items not included in segment profit(1)............ (2,180) 2,810 3,282 -------- -------- -------- Earnings from continuing operations before income taxes........................................... $ 59,009 $122,914 $ 5,369 ======== ======== ======== Assets at end of year Pulse.............................................. $173,027 $229,560 $237,237 AMI Doduco......................................... 111,076 112,085 114,476 -------- -------- -------- Segment assets............................. 284,103 341,645 351,713 Assets not included in Segment assets(2)........... 97,136 179,126 173,307 -------- -------- -------- Total...................................... $381,239 $520,771 $525,020 ======== ======== ======== Capital expenditures(3) Pulse.............................................. $ 10,894 $ 23,323 $ 10,302 AMI Doduco......................................... 12,031 8,379 10,204 -------- -------- -------- Total...................................... $ 22,925 $ 31,702 $ 20,506 ======== ======== ========
F-21 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 2000 2001 -------- -------- -------- Depreciation and amortization Pulse.............................................. $ 12,586 $ 14,129 $ 17,183 AMI Doduco......................................... 6,825 8,249 9,370 -------- -------- -------- Total...................................... $ 19,411 $ 22,378 $ 26,553 ======== ======== ========
- ------------ (1) Includes interest income, interest expense and other non-operating items disclosed in our Consolidated Statements of Earnings. The Company excludes these items when measuring segment operating profit. (2) Cash and cash equivalents are the primary corporate assets. The Company also excludes net deferred tax assets when measuring segment assets. (3) During the past three years, the Company has acquired several companies. See Note 2 of Notes to Consolidated Financial Statements. The Company has included acquired property, plant and equipment in these capital expenditure amounts. The Company recognizes revenue upon shipment of product and passage of title without right of return. The Company offers customers credit terms that are believed to be generally consistent with the terms offered in their industries. The Company reserves for or writes off a customer account when they no longer feel the customer can or will pay. The Company believes that the quality of customers, which are generally large global companies, and their extensive customer base limits their exposure to significant concentrations of customer credit risk. For example, no customer accounted for more than 10% of sales in 1999, 2000 or 2001. Sales to their ten largest customers accounted for 32% of sales in 1999, 36% of sales in 2000 and 31% of sales in 2001. Depending on the amount of cash the Company may have from time to time, it may maintain significant cash investments at financial institutions. The Company has no significant intercompany revenue between its segments. The Company does not use income taxes when measuring segment results; however, the Company allocates income taxes to the segments to determine certain performance measures. These performance measures include return on employed capital and economic profit. The following pro forma disclosure of segment income tax expense is based on simplified assumptions and includes allocations of corporate tax items. These allocations are based on the proportionate share of total tax expense for each segment, obtained by multiplying the respective segment's operating profit by the relevant estimated effective tax rate for the year. The allocated tax expense amounts for Pulse were, in thousands, $10,834, $18,850 and $2,123 in 1999, 2000 and 2001, respectively. For AMI Doduco, they were, in thousands, $3,863, $4,756 and $780 in 1999, 2000 and 2001, respectively. The Company sells its products to customers in North America, Europe, Asia and throughout the world. The following table summarizes its sales to customers in the United States and Germany, where sales are significant. Other countries in which the Company's sales are not significant are grouped into regions. The Company attributes customer sales to the country addressed in the sales invoice. The product is usually shipped to the same country. F-22 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Amounts are in thousands:
1999 2000 2001 -------- -------- -------- Sales to customers in: United States...................................... $226,376 $295,864 $166,237 Europe, other than Germany......................... 108,339 130,611 126,736 Germany............................................ 86,174 76,279 70,792 Asia............................................... 70,589 109,784 80,691 North America, other than U.S. .................... 36,507 46,664 25,163 Other.............................................. 2,451 5,176 4,580 -------- -------- -------- Total.................................... $530,436 $664,378 $474,199 ======== ======== ========
The following table includes net property, plant and equipment located in the United States, Germany and China, where assets are significant. Other countries in which such assets are not significant are grouped into regions. Property, plant and equipment represents all of the relevant assets that have long useful lives. Amounts are in thousands:
1999 2000 2001 ------- ------- ------- Net property, plant and equipment located in: United States......................................... $22,554 $23,896 $22,180 China................................................. 19,170 27,210 23,057 Germany............................................... 14,639 13,935 12,456 Asia, other than China................................ 12,563 14,220 9,191 Europe, other than Germany............................ 10,659 10,477 12,793 Other................................................. 3,137 2,660 3,375 ------- ------- ------- Total....................................... $82,722 $92,398 $83,052 ======= ======= =======
(15) QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly results of operations (unaudited) for 2000 and 2001 are summarized as follows (in thousands, except per share data):
MAR. 31 JUNE 30 SEPT. 29 DEC. 29 -------- -------- -------- -------- 2000: Net sales..................................... $152,693 $163,186 $170,674 $177,825 Gross profit.................................. 54,141 62,542 68,549 69,290 Net earnings.................................. 16,832 24,884 27,784 29,808 Net earnings per share: Basic...................................... .52 .77 .85 .91 Diluted.................................... .52 .76 .84 .90
Earnings per share amounts reflect stock splits through December 28, 2001. F-23 TECHNITROL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED -------------------------------------------- MAR. 30 JUNE 29 SEPT. 28 DEC. 28 -------- -------- -------- -------- 2001: Net sales..................................... $157,244 $112,835 $100,846 $103,274 Gross profit.................................. 50,377 24,771 22,153 17,217 Net earnings.................................. 17,994 (1,459) (9,290) (4,779) Net earnings per share: Basic...................................... .55 (.04) (.28) (.14) Diluted.................................... .54 (.04) (.28) (.14)
(16) SUBSEQUENT EVENT On January 24, 2002, the Company filed a registration statement on Form S-3 for a proposed secondary public offering of 5,600,000 shares of its common stock. The Company expects to use the net proceeds from the sale of shares for repayment of outstanding debt, potential strategic acquisitions and general corporate purposes. A registration statement relating to these securities has been filed with the Securities and Exchange Commission, but it has not yet become effective. These securities may not be sold, nor may offers to buy be accepted, prior to the time the registration statement becomes effective. F-24 TECHNITROL, INC. AND SUBSIDIARIES FINANCIAL STATEMENT SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (In thousands of dollars)
ADDITIONS (DEDUCTIONS) ------------------------ CHARGED TO WRITE-OFFS BALANCE COSTS AND AND BALANCE DESCRIPTION JANUARY 1 EXPENSES PAYMENTS DECEMBER 31 ----------- --------- ---------- ---------- ----------- Year ended December 31, 1999: Reserve for obsolete and slow-moving inventory............................. $17,134 $ 4,483 $(15,334) $ 6,283 ======= ======= ======== ======= Reserve for doubtful accounts........... $ 819 $ 116 $ (53) $ 882 ======= ======= ======== ======= Year ended December 29, 2000: Reserve for obsolete and slow-moving inventory............................. $ 6,283 $ 8,129 $ (5,186) $ 9,226 ======= ======= ======== ======= Reserve for doubtful accounts........... $ 882 $ 1,063 $ (37) $ 1,908 ======= ======= ======== ======= Year ended December 28, 2001: Reserve for obsolete and slow-moving inventory............................. $ 9,226 $20,295 $ (6,004) $23,517 ======= ======= ======== ======= Reserve for doubtful accounts........... $ 1,908 $ 697 $ (45) $ 2,560 ======= ======= ======== =======
- ------------ (1) Primarily relates to acquisitions F-25 [TECHNITROL LOGO] PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is a list of the costs and expenses we expect to pay in connection with the issuance and distribution of the shares of common stock registered hereby, other than underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission Registration Fee. SEC Filing and Registration Fees............................ $ 16,146 New York Stock Exchange Listing Fees........................ 22,540 Legal Fees and Expenses..................................... * Cost of Printing............................................ * Accounting Fees and Expenses................................ * Blue Sky Filing Fees........................................ -0- NASD Fees................................................... 18,050 Miscellaneous Expenses...................................... * -------- Total............................................. $450,000
- ------------ * To be filed by amendment. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Pennsylvania Business Corporation Law generally provides that a company shall have the power to indemnify its officers, directors and others against liability incurred by them by reason of their position with the company if such person acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interest of the company, and, with respect to any criminal action or proceeding related to a third-party action, the indemnified party had no reasonable cause to believe his conduct was unlawful. Section 1 of Article VII of the Company's Bylaws provides for mandatory indemnification of directors and officers against third-party actions in such circumstances. Section 2 of Article VII of the Company's Bylaws provides for mandatory indemnification for any director or officer made party to any derivative suit if he acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interest of the Company; provided, however, no indemnification against expenses will be made where the person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Company unless and to the extent that the applicable Court of Common Pleas shall determine such person is fairly and reasonably entitled to indemnity. Under Section 3 of Article VII, an independent determination of disinterested directors, legal counsel or shareholders of the Company will determine whether the person is entitled to indemnification under Sections 1 and 2, unless indemnification is ordered by a court. In addition, Section 5 of Article VII of the Bylaws provides for advancement of expenses in advance of the final disposition of any action, suit or proceeding upon receipt of an undertaking, by or on behalf of the person who may be entitled to indemnification under Sections 1, 2 and 4 of Article VII, to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Company. The Pennsylvania Business Corporation Law also permits a corporation to include in its bylaws, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the Pennsylvania Business Corporation Law; provided, however, indemnification shall not be permitted in any case where the act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. Section 4 of Article VII of the Company's Bylaws generally provides for mandatory indemnification of officers and directors acting on behalf of the Company, except that indemnification shall not be permitted in any case where the act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. Indemnification under Section 4 will be provided without the independent determination or court order required by Section 3 as described above. The Company also has entered into an II-1 Indemnification Agreement with each of the executive officers and directors of the Company. The Indemnification Agreements provide the same scope of indemnification as provided under the Bylaws. The Indemnification Agreements are direct contractual obligations of the Company in favor of the directors and officers. Therefore, in the event that the Bylaws are subsequently changed to reduce the scope of indemnification, executive officers and directors with Indemnification Agreements will not be affected by such changes. In addition, the Company maintains directors and officers insurance under which its directors and officers are insured against certain liabilities that may be incurred by them in their capacities as such. ITEM 16. EXHIBITS.
EXHIBIT NO. DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement.* 2.1 Agreement and Plan of Merger, dated as of May 23, 2001, as amended as of July 6, 2001, by and among Pulse Engineering, Inc., Pulse Acquisition Corporation, Excelsus Technologies, Inc., and certain principal shareholders of Excelsus Technologies, Inc. that are signatories thereto (incorporated by reference to Exhibit 2 to the Company's Form 8-K dated August 21, 2001). 3.1 Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A/A dated April 10, 1998). 3.2 Amendment to Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3(i)(a) to the Company's Form 10-Q for the quarter ended June 29, 2001). 3.3 By-laws (incorporated by reference to Exhibit 3(ii) to the Company's Form 10-Q for the quarter ended July 2, 1999). 4.1 Rights Agreement, dated as of August 30, 1996, between the Company and Registrar and Transfer Company, as Rights Agent (incorporated by reference to Exhibit 3 to the Company's Registration Statement on Form 8-A dated October 24, 1996). 4.2 Amendment No. 1 to the Rights Agreement, dated as of March 25, 1998, between the Company and Registrar and Transfer Company, as Rights Agent (incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form 8-A/A dated April 10, 1998). 4.3 Amendment No. 2 to the Rights Agreement, dated as of June 15, 2000, between the Company and Registrar and Transfer Company, as Rights Agent (incorporated by reference to Exhibit 5 to the Company's Registration Statement on Form 8-A/A dated July 5, 2000). 5.1 Opinion of Stradley, Ronon, Stevens & Young, LLP.* 10.1 Technitrol, Inc. 2001 Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 dated June 28, 2001, File Number 333-64060). 10.2 Technitrol, Inc. Restricted Stock Plan II, as amended and restated as of January 1, 2001 (incorporated by reference to Exhibit C to the Company's Definitive Proxy on Schedule 14A dated March 28, 2001). 10.3 Technitrol, Inc. 2001 Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 dated June 28, 2001, File Number 333-64068). 10.4 Technitrol, Inc. Board of Directors Stock Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 dated June 1, 1998, File Number 333-55751). 10.5 Revolving Credit Agreement, by and among Technitrol, Inc. and certain of its subsidiaries, Bank of America, N.A, as Agent and Lender, and certain other Lenders that are signatories thereto, dated as of June 20, 2001 (incorporated by reference to Exhibit 10.(a) to the Company's Form 10-Q for the quarter ended June 29, 2001). 10.6 Lease Agreement, dated October 15, 1991, between Ridilla-Delmont and AMI Doduco, Inc. (formerly known as Advanced Metallurgy Incorporated), as amended September 21, 2001. 10.7 Incentive Compensation Plan of Technitrol, Inc. 10.8 Technitrol, Inc. Supplemental Retirement Plan, Amended and Restated January 1, 2002.
II-2
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.9 Agreement between Technitrol, Inc. and James M. Papada, III, dated July 1, 1999, as amended April 23, 2001, relating to the Technitrol, Inc. Supplemental Retirement Plan. 10.10 Letter Agreement between Technitrol, Inc. and James M. Papada, III, dated April 16, 1999, as amended October 18, 2000. 23.1 Consent of KPMG LLP. 23.2 Consent of Stradley, Ronon, Stevens & Young, LLP (contained in Exhibit 5.1 above).* 24.1 Powers of Attorney (incorporated by reference to Exhibit 24.1 to the Company's Registration Statement on Form S-3 dated January 24, 2002, File Number 333-81286).
- ------------ * To be filed by amendment. ITEM 17. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933 ("Securities Act"), each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 ("Exchange Act") (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURE Pursuant to the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Trevose, Commonwealth of Pennsylvania, on February 28, 2002. TECHNITROL, INC. By: /s/ JAMES M. PAPADA, III ------------------------------------ James M. Papada, III, Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ JAMES M. PAPADA, III Chairman, President and February 28, 2002 - --------------------------------------------------- Chief Executive Officer James M. Papada, III (Principal Executive Officer) * Vice President--Finance and February 28, 2002 - --------------------------------------------------- Chief Financial Officer Albert Thorp, III (Principal Financial Officer) * Corporate Controller and February 28, 2002 - --------------------------------------------------- Secretary (Principal Drew A. Moyer Accounting Officer) * Director February 28, 2002 - --------------------------------------------------- David H. Hofmann * Director February 28, 2002 - --------------------------------------------------- J. Barton Harrison * Director February 28, 2002 - --------------------------------------------------- Graham Humes * Director February 28, 2002 - --------------------------------------------------- Edward M. Mazze * Director February 28, 2002 - --------------------------------------------------- Stanley E. Basara * Director February 28, 2002 - --------------------------------------------------- John E. Burrows, Jr. * Director February 28, 2002 - --------------------------------------------------- Rajiv L. Gupta * Director February 28, 2002 - --------------------------------------------------- C. Mark Melliar-Smith *By: /s/ JAMES M. PAPADA, III February 28, 2002 --------------------------------------------- James M. Papada, III As Attorney-In-Fact
II-4 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement.* 2.1 Agreement and Plan of Merger, dated as of May 23, 2001, as amended as of July 6, 2001, by and among Pulse Engineering, Inc., Pulse Acquisition Corporation, Excelsus Technologies, Inc., and certain principal shareholders of Excelsus Technologies, Inc. that are signatories thereto (incorporated by reference to Exhibit 2 to the Company's Form 8-K dated August 21, 2001). 3.1 Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A/A dated April 10, 1998). 3.2 Amendment to Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3(i)(a) to the Company's Form 10-Q for the quarter ended June 29, 2001). 3.3 By-laws (incorporated by reference to Exhibit 3(ii) to the Company's Form 10-Q for the quarter ended July 2, 1999). 4.1 Rights Agreement, dated as of August 30, 1996, between the Company and Registrar and Transfer Company, as Rights Agent (incorporated by reference to Exhibit 3 to the Company's Registration Statement on Form 8-A dated October 24, 1996). 4.2 Amendment No. 1 to the Rights Agreement, dated as of March 25, 1998, between the Company and Registrar and Transfer Company, as Rights Agent (incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form 8-A/A dated April 10, 1998). 4.3 Amendment No. 2 to the Rights Agreement, dated as of June 15, 2000, between the Company and Registrar and Transfer Company, as Rights Agent (incorporated by reference to Exhibit 5 to the Company's Registration Statement on Form 8-A/A dated July 5, 2000). 5.1 Opinion of Stradley, Ronon, Stevens & Young, LLP.* 10.1 Technitrol, Inc. 2001 Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 dated June 28, 2001, File Number 333-64060). 10.2 Technitrol, Inc. Restricted Stock Plan II, as amended and restated as of January 1, 2001 (incorporated by reference to Exhibit C to the Company's Definitive Proxy on Schedule 14A dated March 28, 2001). 10.3 Technitrol, Inc. 2001 Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 dated June 28, 2001, File Number 333-64068). 10.4 Technitrol, Inc. Board of Directors Stock Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 dated June 1, 1998, File Number 333-55751). 10.5 Revolving Credit Agreement, by and among Technitrol, Inc. and certain of its subsidiaries, Bank of America, N.A, as Agent and Lender, and certain other Lenders that are signatories thereto, dated as of June 20, 2001 (incorporated by reference to Exhibit 10.(a) to the Company's Form 10-Q for the quarter ended June 29, 2001). 10.6 Lease Agreement, dated October 15, 1991, between Ridilla-Delmont and AMI Doduco, Inc. (formerly known as Advanced Metallurgy Incorporated), as amended September 21, 2001. 10.7 Incentive Compensation Plan of Technitrol, Inc. 10.8 Technitrol, Inc. Supplemental Retirement Plan, Amended and Restated January 1, 2002. 10.9 Agreement between Technitrol, Inc. and James M. Papada, III, dated July 1, 1999, as amended April 23, 2001, relating to the Technitrol, Inc. Supplemental Retirement Plan. 10.10 Letter Agreement between Technitrol, Inc. and James M. Papada, III, dated April 16, 1999, as amended October 18, 2000. 23.1 Consent of KPMG LLP.
EXHIBIT NO. DESCRIPTION - ------- ----------- 23.2 Consent of Stradley, Ronon, Stevens & Young, LLP (contained in Exhibit 5.1 above).* 24.1 Powers of Attorney (incorporated by reference to Exhibit 24.1 to the Company's Registration Statement on Form S-3 dated January 24, 2002, File Number 333-81286).
- ------------ * To be filed by amendment. EX-10.6 3 w56785a1ex10-6.txt LEASE AGREEMENT Exhibit 10.6 TABLE OF CONTENTS LEASE RIDILLA-DELMONT, LANDLORD ADVANCED METALLURGY INCORPORATED, TENANT
PAGE ---- ARTICLE 1. DEMISE, DESCRIPTION, USE AND TERM Section 1.01. Demised and Description............................. 2 Section 1.02. Use................................................. 2 Section 1.03. Term................................................ 2 ARTICLE 2. RENT, COMMENCEMENT DATE, TERMINATION DATE AND POSSESSION PRIOR TO COMMENCEMENT DATE Section 2.01. Rent For Leased Premises During Term................ 2 Section 2.02. Commencement Date and Termination Date.............. 3 Section 2.03. Possession Prior to Commencement Date............... 3 ARTICLE 3. LANDLORD'S WARRANTIES, CONDITiON OF LEASED PREMISES, TENANT'S CONSTRUCTION Section 3.01. Landlord's Warranty................................. 3 Section 3.02. Condition of Leased Premises........................ 3 Section 3.03. Agreement as to Condition........................... 4 Section 3.04. Tenant's Construction............................... 4 Section 3.05. Conditions to Tenant's Construction................. 4 Section 3.06. Responsibility for Payment.......................... 5 Section 3.07. Continuing Covenant................................. 6 Section 3.08. No Mechanics' Lien Permitted........................ 6 ARTICLE 4. TAXES AND ASSESSMENTS Section 4.01. Payment by Tenant................................... 6 Section 4.02. Hold Harmless....................................... 7 Section 4.03. Proration of Taxes for First Year and Last Year of Term................................................ 7 Section 4.04. Time and Method of Payment.......................... 7 Section 4.05. Payment by Landlord on Tenant's Default............. 8 Section 4.06. Right to Contest, Levy, Assessment or Charge........ 8 ARTICLE 5. INSURANCE AND FIRE LOSS Section 5.01. Tenant's Obligation................................. 9 Section 5.02. Additional Insured.................................. 9 Section 5.03. Proof of Coverage................................... 10 Section 5.04. Protection Against Cancellation..................... 10 Section 5.05. Proceeds............................................ 10 Section 5.06. Fire and Casualty Damage............................ 11 Section 5.07. Tenant's Property................................... 13 ARTICLE 6. UTILITIES Section 6.01. Tenant's Responsibility............................. 13 ARTICLE 7. WASTE AND NUISANCE Section 7.01. Tenant's Responsibility............................. 14
ARTICLE 8. MAINTENANCE AND REPAIRS; INDEMNITY AND HOLD HARMLESS FROM HAZARDOUS WASTE Section 8.01. Landlord's Responsibility........................... 14 Section 8.02. Tenant's Responsibility............................. 14 Section 8.03. Parking Area........................................ 15 Section 8.04. Failure to Repair, Right to Cure.................... 15 Section 8.05. Indemnity and Hold Harmless from Hazardous Waste.... 16 ARTICLE 9. ALTERATIONS, IMPROVEMENTS AND FIXTURES Section 9.01. Trade Fixtures and Equipment........................ 17 Section 9.02. Non-Trade Fixtures.................................. 18 Section 9.03. Landlord's Waiver................................... 19 Section 9.04. Removal on Termination.............................. 19 ARTICLE 10. QUIET POSSESSION Section 10.01. Covenant of Quiet Possession........................ 20 Section 10.02. Subordination, Attornment and Non-Disturbance....... 20 ARTICLE 11. TERMINATION, SURRENDER OF PREMISES AND HOLDING OVER Section 11.01. Termination......................................... 21 Section 11.02. Surrender and Removal of Property................... 21 ARTICLE 12. CONDEMNATION Section 12.01. All of Premises..................................... 22 Section 12.02. Partial............................................. 22 Section 12.03. Damages............................................. 23 ARTICLE 13. DEFAULTS AND REMEDIES Section 13.01. Penalty for Delayed Payment......................... 23 Section 13.02. Default by Tenant................................... 24 ARTICLE 14. INSPECTION BY LANDLORD Section 14.01. Right of Inspection................................. 26 ARTICLE 15. ADDITIONAL TENANT COVENANTS: Section 15.01. Use of Leased Premises.............................. 26 Section 15.02. No Nuisance......................................... 27 Section 15.03. Signs............................................... 28 Section 15.04. Continuing Covenants................................ 28 ARTICLE 16. ASSIGNMENT AND SUBLEASE Section 16.01. Assignment and Subletting by Tenant................. 28 Section 16.02. Assignment by Landlord.............................. 29 ARTICLE 17. MISCELLANEOUS PROVISIONS Section 17.01. Notices and Addresses............................... 29 Section 17.02. Reporting Requirement - Annual Reports.............. 29 Section 17.03. Parties Bound....................................... 30 Section 17.04. Applicable Law...................................... 30 Section 17.05. Legal Construction.................................. 30 Section 17.06. Amendment........................................... 30 Section 17.07. Rights and Remedies Cumulative...................... 30 Section 17.08. Waiver of Default................................... 30 Section 17.09. Time of Essence..................................... 30 Section 17.10. No Brokerage Commission............................. 31 Section 17.11. Security Guaranty................................... 31
Section 17.12. Nonrecordability.................................... 31
EXHIBIT LIST EXHIBIT "A" - Description EXHIBIT "B" - Letter dated October 7, 1991 from Municipality of Murrysville EXHIBIT "C" - Guaranty and Suretyship Agreement EXHIBIT "D" - Memorandum of Lease LEASE AGREEMENT THIS AGREEMENT OF LEASE, made and entered into this 15th day of October, 1991, at Latrobe, Pennsylvania, by and between RIDILLA-DELMONT, a Pennsylvania Limited Partnership, having its principal office and place of business at P.O. Box 472, Latrobe, Pennsylvania 15650 (hereinafter "Landlord"), A N D ADVANCED METALLURGY INCORPORATED, a Corporation, having an office and place of business at 1028 East Smithfield Street, P.O. Box 91, McKeesport, Pennsylvania 15135-0091, and having an additional office in the Commonwealth of Pennsylvania (after the Commencement Date of this Lease) at Murray Corporate Park, Murrysville, Pennsylvania 15668 (hereinafter called ("Tenant"). WHEREAS, Landlord owns a certain lot or parcel of land (hereinafter "Land") situate in Municipality of Murrysville, Westmoreland County, Pennsylvania, being more particularly described in Exhibit "A," attached hereto and made a part hereof; and WHEREAS, Landlord has erected a building on the land containing 115,270 square feet more or less, comprised of warehouse and office space (together hereinafter "Building") together with parking facilities, driveways and other improvements to support the use of the Building (hereinafter "support Facilities"); and WHEREAS, by these presents and this Lease Agreement (hereinafter "Lease") Landlord intends to lease to Tenant and Tenant intends to lease from Landlord the Land, Building and Support Facilities (together hereinafter "Leased Premises") in accordance with the terms and conditions hereinafter set forth; NOW, THEREFORE, Landlord, for and in consideration of the rents, covenants and agreements hereinafter contained on the part of the Tenant to be paid, kept and performed does hereby lease and demise unto the Tenant and Tenant hereby takes and rents from Landlord the Leased Premises under the following terms and conditions: ARTICLE 1. DEMISE, DESCRIPTION, USE AND TERM SECTION 1.01. DEMISE AND DESCRIPTION: Landlord hereby leases unto Tenant, and Tenant hereby leases from Landlord, the Leased Premises, as heretofore defined herein. SECTION 1.02. USE: The Leased Premises shall be used by Tenant only in accordance with those uses set forth hereafter in Article 15, and for no other purpose. SECTION 1.03. TERM: The Term of the Lease shall be ten (l0) years (hereinafter "Term") starting on the Commencement Date as defined hereafter at Section 2.02 and terminating on the Termination Date as defined hereafter at Section 2.02. ARTICLE 2. RENT, COMMENCEMENT DATE, TERMINATION DATE AND POSSESSION PRIOR TO COMMENCEMENT DATE SECTION 2.01. RENT FOR LEASED PREMISES DURING TERM: Tenant agrees to pay and shall pay Landlord at P. O. Box 472, Latrobe, Pennsylvania, or such other place as Landlord shall designate from time to time in writing, as Rent for the Leased Premises during the Term the total rent of $4,092,085.20, which sum shall be payable without demand in equal monthly installments each in advance on the first day of each calendar month starting with the Commencement Date and continuing throughout the Term, as follows: A. For the first month through the sixtieth month, the total rent of $1,988,407.80 (calculated on an annualized basis of $3.45 per square foot), payable in monthly installments of $33,140.13. B. For the sixty-first month through the one hundred twentieth month, the total rent of $2,103,677.40, (calculated on an annualized basis of $3.65 per square foot), payable in monthly installments of $35,061.29. 2 SECTION 2.02. COMMENCEMENT DATE AND TERMINATION DATE: The Commencement Date (hereinafter "Commencement Date") shall be 12:01 A.M. on November 1, 1991, and the Termination Date (hereinafter "Termination Date") shall be 11:59 P.M. on October 31, 2001. SECTION 2.03. POSSESSION PRIOR TO COMMENCEMENT DATE: Tenant shall be entitled to possession prior to the Commencement Date listed above for purpose of commencing Tenant's construction responsibilities as are hereinafter set forth in Article 3. ARTICLE 3. LANDLORD'S WARRANTIES, CONDITION OF LEASED PREMISES, TENANT'S CONSTRUCTION SECTION 3.01. LANDLORD'S WARRANTY: Landlord warrants as follows: A. Zoning Compliance - That as of the date hereof, the Leased Premises are zoned M-1, and, the proposed use as represented by Tenant is a permitted use in the M-1 zone, all as set forth in letter dated October 7, 1991, as issued by the Municipality of Murrysville, a copy of which is attached as Exhibit "B". B. Construction in Accordance with Plans and Specifications - Landlord warrants that the Building and Support Facilities, including the parking area have been constructed in accordance with the Plans and Specifications, a full and complete copy of which have previously been delivered by Landlord unto Tenant. C. No Major Structural Defects - As of the date of this Lease, neither the Building nor the Support Facilities have any major structural defects. SECTION 3.02. CONDITION OF LEASED PREMISES: Other than the warranty of Landlord listed above in Section 3.01, Tenant agrees and admits that no representation as to the condition or repair of the Leased Premises has been made by the Landlord or any agent of the Landlord; and likewise 3 agrees and admits that no agreement or promise to remodel, alter, repair or improve the Leased Premises including all equipment and appurtenances thereon either before or after the execution of this Lease, it has been made by Landlord or any agent of Landlord. SECTION 3.03. AGREEMENT AS TO CONDITION: Landlord and Tenant further agree that a written document shall be executed by each of them after the date of this Lease, which written document shall reference the actual condition of the Leased Premises, and which shall be determative and conclusive as to the condition of the Leased Premises as of the date of this Lease, and shall determine that condition of the Leased Premises that Tenant will be obligated to restore the Leased Premises to as of the Termination Date. SECTION 3.04. TENANTS CONSTRUCTION: Tenant shall be responsible for all remodeling, retrofitting, construction, fabrication or installation of (a) all Tenant improvements required by Tenant to permit; permit Tenant to use the Leased Premises for those purposes otherwise permitted herein as listed in Article 15; (b) the fixturing and equipping of the Leased Premises in accordance with Tenant's standards; (c) all Building signs, letters and logos; (d) the construction and installation of any and all manufacturing or other equipment; and (e) any and all maintenance and remodeling undertaken by Tenant after the Commencement Date and throughout the Term. SECTION 3.05. CONDITIONS TO TENANT'S CONSTRUCTION: Notwithstanding the provisions of Section 3.04 above, prior to Tenant's undertaking any of the construction, installation or fabrication permitted under Section 3.04, Tenant shall submit plans and specifications to Landlord for Landlord's approval in accordance with the provisions of the last paragraph of this Section 3.05, and shall also use its best efforts to accomplish the following: (a) obtain all permits from any federal, state or local municipality, agency or regulatory body having jurisdiction over the 4 Leased Premises, or the operation of Tenant's business on the Leased Premises, and submit evidence of the obtaining of such permits unto Landlord; and (b) supply Landlord with written evidence that Tenant's construction and the proposed use to be made by Tenant of the Leased Premises is in full compliance with any and all ordinances, rules and regulations in effect in the Municipality of Murrysville as the same relate to matters of zoning, subdivision (if applicable), building or remodeling permits, sanitary and other municipal waste, hazardous waste (if applicable), surface water run off (if applicable), emissions into the atmosphere of any nature, or any other matters pertaining to Tenant's use of the Leased Premises or any environmental impact resulting therefrom. In the event Tenant requests Landlord to join in any permit application by reason of Landlord's ownership of the Leased Premises, the Landlord agrees to do so, provided that the responsibility for obtaining such permits shall remain with Tenant, and Tenant shall hold harmless Landlord from any and all costs or liability resulting from Landlord's cooperation hereunder. As set forth heretofore, prior to the commencement of any Tenant improvements, Tenant shall submit plans and specifications for such improvements to Landlord which shall be made part of Landlord's permanent records. No Tenant improvements may be commenced on the Leased Premises until Tenant has received Landlord's approval, which approval shall not be unreasonably withheld, but may be withheld in the event that the submitted plans are not in accordance with recognized standards in the construction industry (whether or not such standards are legally binding in the Municipality of Murrysville). SECTION 3.06. RESPONSIBILITY FOR PAYMENT: Tenant shall be responsible for payment of any and all municipal or other fees incurred by Tenant for any permits required by Tenant for either Tenant's construction or Tenant's uses of the Leased Premises; as set forth in Article 15 hereafter; 5 and which permits shall be acquired by Tenant in accordance with all local, state or federal rules and regulations concerning the issuance and payment thereof; and Tenant shall pay such fees as are required for any permits in a timely matter, together with any other monetary obligations resulting from Tenant's construction or Tenant's occupancy. In this regard, Tenant shall hold harmless and indemnify Landlord from any and all legal responsibility concerning the issuance of such permits, and which indemnification shall extend to any and all attorneys or other fees incurred by Landlord in defending any suit brought on account thereof. SECTION 3.07. CONTINUING COVENANT: The obligations of Tenant hereunder shall be binding for the initial construction contemplated by Tenant hereunder, and shall constitute continuing covenants and obligations for any additional construction undertaken by Tenant on the Leased Premises throughout the Term. SECTION 3.08. NO MECHANICS' LIEN PERMITTED: Tenant shall not do or suffer anything to be done whereby the Leased Premises may be encumbered by a Mechanics' Lien, and shall, whenever and as often as any Mechanics' Lien is filed against the Leased Premises purporting to be for labor or material furnished or to be furnished to Tenant, discharge the same of record within thirty (30) days after the date of filing. Notice is hereby given that Landlord shall not he liable for any labor or materials furnished or to be furnished to Tenant upon credit, and that no Mechanic's, or other lien or any such Labor or materials shall attach to or affect the reversionary or other estate or interest of Landlord in and to the Leased Premises. ARTICLE 4. TAXES AND ASSESSMENTS SECTION 4.01. PAYMENT BY TENANT: Throughout the Term, Tenant shall be responsible for and discharge all real estate taxes, general and special assessments which may be levied on or assessed against the Leased 6 Premises and all improvements and other property located thereon, whether belonging to Tenant or Landlord, and to which either of them may become liable in relation thereto. Notwithstanding anything to the contrary contained in the preceding sentence, any assessments for Municipal improvements shall be pro rated between the Landlord and Tenant based on the useful life of the improvement (with Tenant's responsibility to include the Term remaining at the time of the assessment); together with any taxes (other than Pennsylvania and Federal Income Taxes) which may be levied against the receipts by Landlord of any payments due from Tenant hereunder, or which otherwise result from Landlord's ownership of the Leased Premises. SECTION 4.02. HOLD HARMLESS: Tenant agrees to and shall protect and hold harmless Landlord and the Leased Premises from liability for any and all assessments and charges for which it is otherwise liable, together with any interest, penalties or other sums thereby imposed, and from any sale or other proceedings to enforce payment thereof. SECTION 4.03. PRORATION OF TAXES FOR FIRST YEAR AND LAST YEAR OF TERM: Tenant's obligation to pay for taxes shall commence on the Commencement Date, and Tenant shall be responsible for two-twelfths (2/12ths) of the total taxes levied for 1991. The taxes for the last year of the term shall be prorated between Landlord and Tenant on the basis of the ratio between the time the Leased Premises are leased to Tenant and the time the Leased Premises are not so leased. Such proration shall be on a calendar year basis, whatever the fiscal year of the taxing agency which levies the tax. SECTION 4.04. TIME AND METHOD OF PAYMENT: Tenant's share of the 1991 taxes shall be due and payable on the Commencement Date. Thereafter, upon receipt of any tax bill, Landlord shall immediately forward a copy of the same to Tenant, which shall cause a check or checks to be issued to Landlord for payment of the tax at the discounted rate, and shall forward the 7 payment of the same to Landlord in sufficient time that Landlord can then pay the taxes at the discounted rate set forth in the bill. After payment of the same, Landlord shall forward to Tenant a copy of the receipted tax bill. SECTION 4.05. PAYMENT BY LANDLORD ON TENANT'S DEFAULT: If Tenant fails to pay such taxes, assessments or charges or fails to give written notice of any payment thereof as herein provided, Landlord may at its option and any time after such taxes become due, after notice to Tenant, pay such taxes, assessments or charges together with all penalties and interest which may have been added because of Tenants delinquency or default, and may likewise redeem the Leased Premises or any part thereof, or the Building or improvements situate thereon, from a tax sale or sales. Any such amount so paid by Landlord shall become immediately due and payable as additional rent by Tenant to Landlord, together with interest thereon at the Prime Interest Rate published in the Wall Street Journal from time to time from the date of payment by Landlord until paid by Tenant. Any such payment by Landlord shall not be deemed to be a waiver of any other rights which Landlord may have under the provisions of this Lease or as provided by law. SECTION 4.06. RIGHT TO CONTEST, LEVY, ASSESSMENT OR CHARGE: Tenant shall have the privilege, acting in the name of the Landlord, but at the sole cost and expense of Tenant, before delinquency occurs, of protesting, contesting, objecting to, or opposing the legality or amount of any such assessments or public charges to be paid by Tenant hereunder. If Tenant shall, in good faith, deem the same to be illegal or excessive, and in the event of any such contest, it may to the extent provided by law defer payment of any such assessment or charge so long as the legality or the amount is contested in good faith; provided, however, that if at any time payment of the whole or any part thereof shall become necessary in order to prevent the termination, by sale or otherwise, of the right of redemption of any property affected thereby, or to prevent eviction of either Landlord or 8 Tenant because of nonpayment thereof, Tenant shall pay the same in order to prevent such termination of the right of redemption or such eviction. ARTICLE 5. INSURANCE AND FIRE LOSS SECTION 5.01. TENANT'S OBLIGATION: Tenant agrees to and shall, prior to the date that Tenant takes occupancy, secure from a good and responsible company or companies licensed to do business in the Commonwealth of Pennsylvania and which has a minimum rating of A, as rated by Best's Rating Service, and maintain during the Term and the Extended Term, the following insurance coverage: A. Fire and extended coverage insurance in an amount not less than $3,500,000.00, with said amount to be increased at the lesser of (a) three (3) percent per annum, or (b) that rate of increase published by the insurance companies in Allegheny County as the recommended incremental increase for properties of like kind; with the increase to become effective on an annual basis commencing with the year following the third (3rd) anniversary of the Commencement Date and continuing throughout the Term. The coverage shall be in addition to any insurance Tenant maintains on its own property in the Leased Premises. B. Public liability insurance in the minimum amount of $5,000,000.00 per loss from an accident resulting in bodily injury to or death of persons or destruction of property. C. Workman's Compensation Insurance in an amount not less than the minimum amount required under Pennsylvania Law. D. Business Interruption Insurance sufficient for Tenant to pay the rents otherwise due under 5.06D hereafter. SECTION 5.02. ADDITIONAL INSURED: Tenant agrees that additional insureds shall be named on the aforementioned policies of insurance as follows: 9 A. Under the fire and extended coverage insurance required under Section 5.01A, Tenant, Landlord, P. Richard Ridilla, John M. Ridilla and the Ridilla-Delmont Trust shall all be named as their interests may appear, and the Landlord's Lender (if any) shall be named on a standard mortgagee clause. B. Under the public liability insurance required under Section 5.01B, Tenant, Landlord, P. Richard Ridilla, John M. Ridilla, and the Ridilla-Delmont Trust shall all be named as their interests may appear. SECTION 5.03. PROOF OF COVERAGE: Upon written notice, Tenant agrees to provide Landlord or any other party for which coverage is required hereunder a certificate of coverage. SECTION 5.04. PROTECTION AGAINST CANCELLATION: All policies of insurance shall contain the provision that no policy shall be canceled or altered without ten (10) days prior written notice to any of the named parties listed thereon. SECTION 5.05. PROCEEDS: As between Landlord and Tenant, upon the occurrence of an event for which proceeds are payable under the fire and extended coverage policy, Landlord shall be entitled to receive all proceeds other than those listed hereinafter in Section 5.07, and in any event not less than the cost of repair and/or rebuilding the Building or any other portion of the Leased Premises, whether or not the same are rebuilt under Section 5.06A hereafter. Notwithstanding anything contained herein to the contrary, in the event of damage to the Building, and the cost to restore the Building will be less than $5,000, then Tenant shall have the right to receive such proceeds, and shall be required to repair or rebuild the same with reasonable diligence. 10 SECTION 5.06. FIRE AND CASUALTY DAMAGE: If the Building and/or Support Facilities should be damaged or destroyed by fire, flood or other casualty, Tenant shall give immediate written notice thereof to Landlord. A. If the Building and/or Support Facilities or any part thereof should be damaged or destroyed by fire, flood or other casualty, Landlord shall, except as otherwise provided herein, repair and/or rebuild the same with reasonable diligence at Landlord's sole cost and expense. Landlord's obligation hereunder shall be limited to the replacement, restoration and repair, as applicable, of the Building and Support Facilities originally provided by Landlord and all such replacement, restoration and repair must be completed and possession of the entire Leased Premises tendered to Tenant within one hundred eighty (180) days from the date of the occurrence of such casualty. Within twenty (20) days of the date of such casualty, damage or destruction, Landlord shall furnish Tenant, in writing, a projected completion date for Landlord's repairs, replacement and/or reconstruction. If Landlord's projected completion date is more than one hundred eighty (180) days from the date of casualty, damage, and/or destruction, then within fourteen (14) days after Tenant receives Landlord's written projected completion date, Tenant shall have the right to terminate this Lease by providing Landlord written notice of its election to terminate, effective as of the date of the occurrence of the casualty. In the event that: (i) Tenant elects not to terminate this Lease after being notified that Landlord's projected completion date is more than one hundred eighty (180) days after the date of casualty, damage and/or destruction and Landlord fails to complete its work by Landlord's projected completion date; or, 11 (ii) Landlord's projected completion date is less than one hundred eighty (180) days from the date of casualty, damage and/or destruction and Landlord fails to complete its work within said one hundred eighty (180) days; then Tenant may terminate this Lease by providing Landlord with written Notice of Tenant's election to terminate, provided such notice of termination is given prior to completion of Landlord's work. The effective date of termination shall be set forth on Tenant's written notice, although Tenant shall be entitled to an additional period of time, not to exceed sixty (60) days, to remove Tenant's property, including Tenant's Trade Fixtures and Equipment as that term is defined in Section 9.01, from the Leased Premises. During this additional period of time after the Termination of Lease Agreement, Tenant shall continue to pay the then current rent on a per diem basis. B. Landlord shall not be obligated to replace, repair, or restore any property belonging to Tenant or any improvements to the Leased Premises made by Tenant. C. In the event that such a casualty or occurrence involving substantial damage or substantial destruction occurs within the last three (3) years of the Term of this Lease, then Landlord shall have no obligation to replace, repair and/or restore the Leased Premises, and this Lease shall be deemed terminated effective as of the date of the occurrence of the casualty. Tenant shall then have a reasonable period time not to exceed sixty (60) days, to remove Tenant's property, including Tenant's Trade Fixtures and Equipment as that term is defined hereafter at Section 9.01 from the Leased Premises during which period of time no rents shall be due and payable to the Landlord. 12 D. In the event of casualty, which does not otherwise cause a termination of this Lease, Tenant shall be obligated to pay rent for all periods prior to the effective date of termination whether or not the Leased Premises are occupied. SECTION 5.07. TENANT'S PROPERTY: Notwithstanding the language of Section 5.06, and subject to the payment to Landlord as set forth in Section 5.05, any insurance due and payable resulting from loss to Tenant's Trade Fixtures and Equipment as defined in Section 9.01 shall be paid to Tenant. ARTICLE 6. UTILITIES SECTION 6.01. TENANT'S RESPONSIBILITY: The Tenant shall, from and after the Commencement Date, and continuing throughout the Term, pay all charges for telephone, gas, electricity, sewage and water used in or on the Leased Premises as such charges are or may be determined by a meter dedicated solely to the Leased Premises. Tenant further agrees to pay all charges for repairs to any and all meters on the Leased Premises whether necessitated by ordinary wear and tear, temperature extremes, accidents or any other cause. Such payment shall be made immediately upon receipt by Tenant of the invoice for said charges. Nevertheless, notwithstanding anything to the contrary herein contained, Tenant shall have the right to contest any charges for utility services or meter repairs, pursuant to the same terms and conditions as provided for contesting taxes under Section 4.06 hereof. It is also understood and agreed that any hookups, feeds or service connections or facilities for utilities contemplated hereunder, shall also be the responsibility of Tenant, either for the commencement of service at any time after the date hereof, and continuing throughout the Term. 13 ARTICLE 7. WASTE AND NUISANCE SECTION 7.01. TENANTS RESPONSIBILITY: Tenant shall not commit, or suffer to be committed, any waste to the Leased Premises, nor shall it maintain, commit, or permit the maintenance or commission of any nuisance on the Leased Premises or use the Leased Premises for any unlawful purpose; nor permit any activity or any condition to exist upon the Leased Premises which would invalidate or prevent the procurement of any insurance policy which may at any time be required pursuant to the provisions of Article 5 hereof. ARTICLE 8. MAINTENANCE AND REPAIRS; INDEMNITY AND HOLD HARMLESS FROM HAZARDOUS WASTE SECTION 8.01. LANDLORD'S RESPONSIBILITY: Landlord's liability for maintenance and repairs of the Leased Premises shall be limited to structural and roof repairs to the interior and exterior of the Building and Support Facilities throughout the Term, other than any changes or alteration to the structure of the interior and exterior of the Building and Support Facilities as contemplated by Tenant's construction under Article 3 (which such changes or alterations shall be the responsibility of Tenant); or any repairs necessitated by Tenant's use of the Leased Premises. SECTION 8.02. TENANT'S RESPONSIBILITY: Other than Landlord's responsibility as set forth in Section 8.01, Tenant shall be responsible for any and all repairs, both of a minor and major nature for the Leased Premises, and agrees to keep the Leased Premises in good order and repair, together with any and all alterations, additions and improvements therein or thereto; and shall at Tenant's own expense promptly make all needed repairs and replacements in and to the Leased Premises including sidewalks, water, sewer and gas connections, pipes and mains, and all other fixtures, machinery and equipment, all mechanical, electrical and plumbing systems, now or hereafter belonging to or connected with the Leased Premises or used in its operation. All such repairs and replacements shall be of first class 14 quality, sufficient for the proper maintenance and operation of the Leased Premises. Tenant shall also be completely responsible for all maintenance, repair and replacement of the parking areas, and also agrees to have full and complete responsibility for the removal of ice, snow and trash as required. Trash must be placed in covered containers in order that it cannot blow about the premises or any abutting property. Grass cutting and all maintenance of lawn and shrubbery is the responsibility of the Tenant. All repairs, maintenance and upkeep required of Tenant hereunder shall be in accordance with all applicable State, Federal and local rules, regulations and ordinances. SECTION 8.03. PARKING AREA: As listed above in Section 8.02, the maintenance, repair and replacement of parking facility and also any driveways forming a portion of the Leased Premises shall be the sole responsibility of Tenant. Tenant hereby agrees that (subject to Landlord's warranties as listed heretofore in Section 3.01), it shall receive the existing parking facility and access drives in an "as is" condition as of the Commencement Date and any damage caused to them hereafter shall be the responsibility of Tenant, which shall repair the same in accordance with its other repair responsibilities outlined in this Article 8. In addition, in the event Tenant causes any damage, other than that caused by reasonable wear and tear, to any of the access roads or abutting industrial sites in the Murray Corporate Park resulting from overweight vehicles, etc., Tenant shall reimburse Landlord for any such damage resulting therefrom. SECTION 8.04. FAILURE TO REPAIR, RIGHT TO CURE: Failure on the part of either Landlord Tenant to fulfill its duty to repair the Leased Premises shall constitute a default under the Terms of this Lease. Landlord or Tenant shall be permitted to accomplish the required repairs or perform any work or construction required to fulfill Landlord's or Tenant's responsibility under this Article; and if either does the same, the work 15 shall not constitute a waiver of the other's default in failing to perform its obligations of repair hereunder, or the right to payment therefore. The cost to Landlord of making such repairs shall be considered additional rents due hereunder, which Tenant shall be obligated to pay in accordance with the terms hereof; and if Tenant does the same, Tenant shall have the right to offset its reasonable costs and expenses, which were actually incurred by Tenant to perform any work or construction required to fulfill Landlord's responsibility under this Article, against the rent due hereunder. SECTION 8.05. INDEMNITY AND HOLD HARMLESS FROM HAZARDOUS WASTE: Landlord and Tenant hereby each agrees to defend, indemnify and hold harmless each other and each other's partners, shareholders, directors, officers, employees and agents, assignees, subtenants or successors in interest and their directors, officers, employees and agents, from and against any and all losses, claims, damages, penalties and liability, including all out-of-pocket litigation costs and reasonable fees and expenses of counsel, (i) including all foreseeable and all unforeseeable consequential damages, directly or indirectly, arising out of the use, generation, storage, release or disposal of Hazardous Materials by the indemnifying party, its agents or contractors prior to execution of this Lease or at any time thereafter, and (ii) including, without limitation, the cost of any required or necessary repair, cleanup, or detoxification and the preparation of any closure or other required plants, whether such action is required or necessary prior to or following the Commencement Date of the Term, to the full extent that such action is attributable, directly or indirectly, to the presence or use, generation, storage, release, threatened release, or disposal of Hazardous Materials by the indemnifying party on, under or in the property underlying the Leased Premises. For the purposes of this Section 8.04, Hazardous Materials shall include but not be limited to substances defined as "hazardous substances," "Hazardous Materials," or "toxic substances" in the 16 Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq.; and those substances defined as hazardous, toxic, hazardous wastes, toxic wastes or as hazardous or toxic substances by any law or statute now or hereafter in effect in the State in which the Leased Premises are located, and in the regulations adopted and publications promulgated pursuant to said laws. The provisions of this paragraph shall survive the Termination Date, and become continuing covenants thereafter. ARTICLE 9. ALTERATIONS, IMPROVEMENTS AND FIXTURES SECTION 9.01. TRADE FIXTURES AND EQUIPMENT: Tenant shall have the right, as part of Tenant's construction contemplated under Article 3, and at any time thereafter, at any time and from time to time during the Term, at its sole cost and expense, to affix and install such personal property, trade fixtures and equipment, of either a permanent or non-permanent nature (herein collectively "Trade Fixtures and Equipment"), to, in, or on the Leased Premises as it shall in its sole discretion deem advisable. For purposes of this paragraph, Trade Fixtures and Equipment shall incorporate and mean all such property referred to in the above sentence, other than Non-Trade Fixtures as defined hereafter in Section 9.02. All Trade Fixtures and Equipment affixed and/or installed or in any way placed in or on the Leased Premises shall at all times belong to Tenant and may be removed by Tenant at any time during the Term or within a reasonable time after the expiration of the Term (provided Tenant shall pay to Landlord rental for the period of occupancy beyond the Termination Date based on the preceding month's rent under the Lease, multiplied by a factor of 125%, and pro rated on a daily basis), provided that any damages to the Leased Premises 17 caused by such removal shall be repaired by Tenant at its own cost and expense. Notwithstanding other provisions of this Section 9.01, Tenant agrees that in its fixturing or the installation of any equipment and trade fixtures permitted herein, that it will not cause any excess load nor undue stress on or to the structural portion of the Building or the Support Facilities. SECTION 9.02. NON-TRADE FIXTURES: All structural alterations, additions, improvements to the Land or Building (herein "Non-trade Fixtures"), constructed upon or affixed to the Leased Premises will immediately become and remain the property of Landlord. For purposes of this Lease, "Non-trade Fixtures" shall be defined as: (a) permanent structural alterations, additions and improvements to the Land or Building, such as new interior permanent walls and other structural remodeling; (b) roof mounted air-conditioning or heating systems; (c) concrete pads; (d) additional utilities installed on the Leased Premises, such as gas, water, electric, including panels and conduits up to but not including any control panels located on Tenant's equipment or machinery; (e) light fixtures; (f) plumbing fixtures; (g) space heaters hung from or attached to the Building by piping or other connections; (h) carpeting; (i) window coverings; (j) the smoke alarm system or systems; (k) any and all conduit installed for the telephone, security, smoke alarm or fire prevention systems; (l) any pre-treatment facilities required by Tenant for the disposal of its sanitary sewer waste; and (m) any replacement of or substitution by Tenant of any of the above throughout the Term. Notwithstanding any other language of this paragraph, the term "Non-Trade Fixtures" shall not include any "buss duct" installed by Tenant on the Leased Premises, which shall be considered within the definition "Trade Fixtures and Equipment" under Section 9.01. 18 SECTION 9.03. LANDLORDS WAIVER: Tenant shall have the right to finance through a bonafide lending agency (hereinafter "Tenant's Lender") any of the Trade Fixtures and Equipment which it determines to install in the Leased Premises; and in which event, Landlord agrees to execute a Landlord's Waiver in such form as is hereinafter agreed to; however, Landlord shall not be obligated to issue any Landlord's waiver for Non-Trade Fixtures as defined in Section 9.02 above. Whatever the form of Landlord's Waiver, the same shall contain adequate assurances to Landlord that (a) in the event Tenant's Lender causes the removal of any collateral from the Leased Premises, that Tenant's Lender shall repair any and all damage to the Leased Premises; (b) in the event of termination of the Lease for any reason, Tenant's Lender shall cause removal of the collateral within thirty days after having been given written notice of such termination; and (c) Tenant's Lender agrees to pay rent for the Leased Premises for the period between the termination and the date of removal. SECTION 9.04. REMOVAL ON TERMINATION: Upon termination of this Lease for any reason, provided that Tenant is otherwise not in default hereof, Tenant shall cause the removal of all Trade Fixtures and Equipment together with such of the Non-trade Fixtures that were installed by Landlord as Landlord shall direct. As stated heretofore, Tenant shall not have the right to remove any of the Non-trade Fixtures without Landlord's prior written consent. Upon removal of the Trade Fixtures and Equipment and the Non-trade Fixtures for which written consent has been given by Landlord, Tenant shall cause the Leased Premises to be restored to the same condition as they are in as of the Commencement Date, reasonable wear and tear accepted. 19 ARTICLE 10. QUIET POSSESSION SECTION 10.01. COVENANT OF QUIET POSSESSION: Landlord shall, on the Commencement Date, place Tenant in quiet possession of the Leased Premises and shall secure it in the quiet possession thereof against all persons claiming the same during the Term. In the event that Landlord cannot deliver quiet possession as aforesaid on the Commencement Date, this Lease Agreement may, at the option of Tenant, terminate and all monies, if any, delivered to Landlord on account of rent and security deposit, or other charges shall be refunded to Tenant, and the Lease shall be deemed void from inception. SECTION 10.02. SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE: This Lease shall be subordinate, at the option of Landlord, to any and all encumbrances given by Landlord which may be required for the financing or the refinancing of the Leased Premises from time to time (including any financing which may be in place as of the Commencement Date) so long as Landlord obtains from its Lender a Subordination and Attornment Agreement which provides inter alia that if such Lender or any successor in interest thereto comes into possession of the Leased Premises or any part thereof; or shall become the owner of the Leased Premises or otherwise take over the rights of Landlord of the Leased Premises, that such holder shall not disturb the possession, use or enjoyment of the Leased Premises by Tenant, its successors or assigns, nor disaffirm this Lease or Tenant's rights or any Estate granted hereunder, so long as Tenant performs all of its obligations in accordance with the terms of this Lease; and in which event, Tenant shall attorn to the rights of such holder. In the event of such agreement, Tenant shall agree as part of the attornment portion of the same, not to hold the Lender responsible for any default of Landlord that may have occurred prior to the date that Lender may succeed to the rights of Landlord thereunder. 20 ARTICLE 11. TERMINATION, SURRENDER OF PREMISES AND HOLDING OVER SECTION 11.01. TERMINATION: As set forth heretofore, this Lease shall terminate at 11:59 P.M. on October 31, 2001, and Tenant agrees to vacate said premises by said date. If Tenant shall remain in possession of all or any part of the Leased Premises after the expiration of the Term, then Tenant shall be deemed a Tenant of the Leased Premises from month-to-month at the rental rate of twenty-five (25%) percent in excess of rent paid during the one hundred twentieth month of the Term, subject to all the terms and provisions hereof except as to the Term. For purposes of this Section 11.01, Tenant shall not be deemed to have held over if its vacation of the Leased Premises is completed by the close of business of the tenth day following the Termination Date, with time being of the essence (provided that Tenant pays rent for such 10 day period in accordance with the terms of this Section 11.01. SECTION 11.02. SURRENDER AND REMOVAL OF PROPERTY: On expiration of the Term as set forth in Section 11.01 hereof, any Trade Fixtures and Equipment and Non-Trade Fixtures installed by Tenant not removed under Section 9.04 shall be deemed to have been abandoned by Tenant and may be retained or disposed of by Landlord with no resulting liability or charge due and owing Tenant; but with Landlord being entitled to recover from Tenant any costs incurred by Landlord resulting from such non-removal. If termination is caused by default of Tenant resulting from failure of Tenant to pay rent, Tenant shall not have any right to remove any property whatsoever from the Leased Premises and shall have no further rights concerning the same and none of Tenant's property shall be removed from the Leased Premises (other than that property for which a Landlord's Waiver has been granted by Landlord pursuant to the provisions of Section 9.03 hereof if the same are removed by Tenant's Lender); and in which event, Landlord shall be entitled to recover 21 from Tenant as additional damages any and all reasonable costs actually incurred by Landlord in restoring the Leased Premises to the condition they were in as of the Commencement Date. ARTICLE 12. CONDEMNATION SECTION 12.01. ALL OF PREMISES: If during the Term of this Lease or any renewal thereof, all of the Leased Premises should be taken for any public or quasi-public use under any law, ordinance or regulation, or by right or eminent domain, this Lease shall terminate automatically as of the date of the filing of the Declaration of Taking; and the rent and other charges shall be abated during the unexpired portion of the Term, effective as of the date of the taking of said premises by the condemning authority. In the event of said taking, then Landlord and Tenant Shall each be entitled to such damages as Landlords and Tenants are otherwise entitled to under applicable Pennsylvania Law, and Tenant shall be entitled to such additional damages as it may be entitled to by reason of being a "Displaced Person" under the Eminent Domain Code of 1964, and any amendments thereto. SECTION 12.02. PARTIAL: If less than all of the Leased Premises shall be taken for any public or quasi-public use under any law, ordinance, or regulation, or by right of eminent domain, this Lease shall not terminate but Landlord shall forthwith at its sole expense, restore and reconstruct the Building and Support Facilities, and other improvements, situated on the Leased Premises, provided such restoration and reconstruction shall in the reasonable business judgment of Tenant, make the same tenantable and suitable for the uses for which the premises are Leased within 180 days of the date of taking. Within twenty (20) days of the date of taking, Landlord shall furnish Tenant in writing a projected completion date for Landlord's restoration and reconstruction. If Landlord's projected completion date is more than 180 days from the date of taking, then within fourteen (14) days 22 after Tenant receives Landlord's written projected completion date, Tenant shall have the right to terminate the Lease by providing Landlord written notice of its election to terminate, effective as of the date of taking. Additionally, Tenant shall have the same rights, and Landlord shall have the same obligations, with respect to restoration and reconstruction following taking, as provided for with respect to restoration and reconstruction following the occurrence of fire or other casualty as set forth in Section 5.06 hereof. In the event of a partial taking and the Landlord completes the restoration and reconstruction as provided herein, the rent and other charges payable hereunder during the unexpired portion of this Lease, from the date of taking, shall be abated or adjusted equitably, as appropriate under the circumstances. In the event of such partial condemnation, Landlord shall be entitled to any and all awards due and payable. SECTION 12.03. DAMAGES: Notwithstanding the provisions of Section 12.01 and 12.02, in the event of condemnation, Tenant shall be entitled to special damages permitted tenants under Article 6-A of the Eminent Domain Code of 1964, as amended or any supplements or amendments thereto, or any other supplemental payments permitted to tenants under laws then in effect. ARTICLE 13. DEFAULTS AND REMEDIES SECTION 13.01. PENALTY FOR DELAYED PAYMENT: If the payment of any rent due hereunder is not received by Landlord by the seventh day of the month for which payment is due, there shall be imposed a penalty of (a) five (5) percent of the base amount of such payment, and (b) an additional five (5) percent commencing 21 days after receipt of written notice by Tenant that payment has not been received within said seven (7) day period; and which penalties shall be in addition to any and all payments otherwise due 23 hereunder. The maximum penalty imposed on any single monthly installment or rent by this Section shall be ten (10%) percent of such installment. SECTION 13.02. DEFAULT BY TENANT: If Tenant shall (a) allow the rent to be in arrears more than thirty (30) days after Tenant has received written notice of the same from Landlord; or (b) default in any other provision of this Lease, and allow said default to continue for thirty (30) days from the date of receipt of said notice, without instituting measures which will correct said default within ninety (90) days thereafter; or (c) assign this Lease or sublet the whole or any part of the Leased Premises or permit any other person to occupy the whole or any other part of the Leased Premises (other than to an affiliate of Tenant) without the express written consent of Landlord; or (d) allow or permit an execution to be issued against Tenant which is not stayed by payment or other means within fifteen (15) days from the date of issue of said execution; or (e) permit or allow bankruptcy proceedings to be instituted by or against Tenant in which Tenant is a debtor and which are not withdrawn or dismissed within thirty (30) days after the institution of said proceedings; or (f) permit or allow an assignment to be made by Tenant for the benefit of creditors; or (g) permit or allow a receiver to be appointed for Tenant by legal proceedings or otherwise; or (h) permit or allow a sale to be made of any of Tenant's personal property by legal process; then in any of the above listed events, Landlord may, at its option, without further notice to Tenant, declare Tenant to be in default and after doing so, be entitled to the following remedies: A. Landlord may at its option without notice to Tenant, terminate this Lease; or in the alternative Landlord may reenter and take possession of the Leased Premises and remove all persons and property therefrom, without being deemed guilty of any manner of trespass, and relet the premises or any part thereof, for all or any part of the remainder of said Term, to a party satisfactory to Landlord, and at such monthly rental as 24 Landlord may with reasonable diligence be able to secure. Should Landlord be unable to relet after reasonable efforts to do so, or should such monthly rental be less than the rental Tenant was obligated to pay under this Lease, or any renewal thereof, plus the expense of reletting, the Tenant shall pay the amount of such deficiency to Landlord. B. Landlord may bring a suit for damages against Tenant for rents due and payable, and may also bring an action for specific performance to maintain its rights under this Lease. C. Notwithstanding re-entry and termination pursuant to the above sections, Tenant shall remain liable for any rent and damages, which may be due or sustained prior thereto, all reasonable costs, all legal and other professional fees and expenses incurred by Landlord in recovering the Leased Premises or recovering any monies due under this Lease and in leasing the Premises to another Tenant. Tenant shall also be liable for damages to be calculated in the following manner: Tenant shall pay an amount of money equal to the total rent which but for termination would have become payable during the remainder of the Term, less the amount of rent, if any, which Landlord may receive during such period from others to whom the Leased Premises may be rented on such terms and conditions and that such rentals as Landlord, in its sole discretion, shall deem proper. D. In any event of default, Landlord may declare the balance of the rents due during the balance of the Term as if by the Terms of the Lease, the same were all payable in advance. E. All rights and remedies of Landlord under this Lease shall be cumulative, and none shall exclude any other right or remedy at law. Such rights and remedies may be exercised and enforced concurrently and whenever and as often as occasion therefore arises. 25 ARTICLE 14. INSPECTION BY LANDLORD SECTION 14.01. RIGHT OF INSPECTION: Tenant shall permit Landlord, its respective agents or mortgagees, after reasonable notice of not less than forty-eight (48) hours, to enter onto and upon the Leased Premises (except for those areas where confidential material is stored) at all reasonable times during regular business hours, subject to Tenant's normal safety and security regulations, for the purpose of inspecting the same or for the purpose of maintaining or making repairs or alterations to the building. ARTICLE 15. ADDITIONAL TENANT COVENANTS: SECTION 15.01. USE OF LEASED PREMISES: Tenant shall use the Leased Premises only for the following purposes: A. Industrial use in accordance with Tenant's business, provided that in accomplishing such use, Tenant must comply with all zoning ordinances, restrictive covenants, rules, laws and regulations in effect at all times throughout the Term of this Lease. B. After the commencement of the Term, in the event that Tenant is required to obtain permits for the use of the Leased Premises, then Tenant shall bear the responsibility of obtaining all permits required and subject to Section 13.02 hereof, failure to obtain such permits shall constitute a default hereunder. C. Tenant agrees not to use or occupy, suffer or permit the Leased Premises or any part thereof to be used or occupied for any purpose contrary to law or the rules and regulations of any public authority, or in any manner deemed an unreasonable fire or safety hazard by competent municipal authority or board of fire underwriters. D. No use of the Leased Premises shall be permitted other than what they are structurally designed for. 26 E. No intended use by Tenant of the Leased Premises shall be permitted for which the Leased Premises must be materially altered without first obtaining the permission of Landlord, and in addition to which, any alteration required shall be subject to the limitations heretofore set forth in Article 3. F. No use shall be permitted which violates any law or regulation pertaining to environmental hazards or environmental protection of any state, local or federal agency. G. No use of the Leased Premises shall be permitted which involves the raising or slaughtering of live stock or any other animals of any kind. H. All landscaping on the Leased Premises shall be maintained by Tenant in order that the Leased Premises and the amenities thereto retain a neat and clean appearance. H. All landscaping on the Leased Premises shall be maintained by Tenant in order that the Leased Premises and the amenities thereto retain a neat and clean appearance. I. No use of the Leased Premises shall be permitted which attracts large numbers of persons or large crowds on a regular basis. J. In the event that an association of tenants or owners in the Murray Corporate Park is formed, then Tenant shall become a member of the same and thereafter comply with all reasonable rules and regulations of the association. SECTION 15.02. NO NUISANCE: Tenant agrees not to utilize the premises for any use which constitutes a nuisance or unreasonable interference with other users of the Murray Corporate Park. In this regard, the following restrictions shall be in effect: A. No employees, invitees, business visitors or other individuals utilizing the Leased Premises at any time shall be permitted to park their motor vehicles in any space that is not completely contained 27 within the Leased Premises (nor on any portion of the access road, whether within the Leased Premises or not). B. No retail sales of any kind whatsoever shall be permitted on the Leased Premises. SECTION 15.03. SIGNS: Tenant shall be permitted to erect a sign or signs in accordance with an approved design hereinafter agreed to between Landlord and Tenant. After occupancy, Tenant shall not erect any other sign without the prior approval of Landlord which approval shall not be unreasonably withheld or delayed. All signs, when erected, shall be maintained by Tenant in a good state of repair throughout the time that the same are erected, and must meet standards imposed by ordinances, laws and regulations of all governing bodies having jurisdiction over the same. SECTION 15.04. CONTINUING COVENANTS: The requirements set forth heretofore in Section 15.01 through 15.03 shall be applicable and binding upon Tenant and continuing obligations and restrictions upon Tenant's use of said Leased Premises throughout the Term. ARTICLE 16. ASSIGNMENT AND SUBLEASE SECTION 16.01. ASSIGNMENT AND SUBLETTING BY TENANT: Tenant shall not assign this Lease or sublet all or any portion of the Leased Premises except for an assignment to, or sublet by, an affiliate of Tenant without the prior written consent of Landlord, such consent not to be unreasonably withheld. In addition, the term "assignment" shall include in addition to an out-right assignment of this Lease, (a) any transfer of more than fifty (50) percent of the outstanding shares of Tenant; (b) the granting by the owner of Tenant of an option to a third party to acquire more than fifty (50) percent of the shares of Tenant; (c) any merger of Tenant into any other corporation; (d) dissolution of Tenant; or (e) any other fundamental change of Tenant by which the ownership of Tenant is altered in any way. In 28 the event of such transfer, the restrictions against assignment otherwise contained in this Section 16.01 shall continue to be binding upon the transferee. In the event of an Assignment permitted under this Section, then all of the terms, restrictions and covenants of this Lease, including the restrictions against Assignment, otherwise contained in this Agreement, shall continue to be binding upon the assignee. SECTION 16.02. ASSIGNMENT BY LANDLORD: Landlord shall have the right of assignment of this Lease at any time. ARTICLE 17. MISCELLANEOUS PROVISIONS SECTION 17.01. NOTICES AND ADDRESSES: All notices provided under this Lease Agreement shall be given by certified mail, return receipt requested, and considered received upon delivery or refusal of delivery by the addressee set forth in said notice. Said notices shall be sent to the address specified on page one (1) hereof, or to such other address as either party shall have designated to the other. The addresses may be changed upon written notice by either party to the other to such other address as such party sets forth in writing. SECTION 17.02. REPORTING REQUIREMENT - ANNUAL REPORTS: It is acknowledged that prior to the date hereof, Tenant has caused to be prepared and delivered unto Landlord its last audited financial statement. From and after the date hereof, Tenant shall cause to be prepared and delivered unto Landlord its annual financial statements prepared in accordance with GAAP on or before ninety (90) days after the close of each fiscal year throughout the Term; provided that nothing contained within the financial statements shall be construed in any matter to constitute a default under this Lease (provided that Tenant is otherwise in compliance with all of the Terms hereof). 29 SECTION 17.03. PARTIES BOUND: This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, administrators, representatives and assigns, when otherwise permitted by this Agreement. SECTION 17.04. APPLICABLE LAW: This Agreement shall be construed under and in accordance with the laws of the Commonwealth of Pennsylvania, and all obligations of the parties created hereunder are performable in Westmoreland County, Pennsylvania. SECTION 17.05. LEGAL CONSTRUCTION: In case any one or more of the provisions contained in this Lease shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision thereof and this Lease shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein. SECTION 17.06. AMENDMENT: No amendment, modification, or alteration of the terms hereof shall be binding unless the same be in writing, dated subsequent to the date hereof, and duly executed by the parties hereto. SECTION 17.07. RIGHTS AND REMEDIES CUMULATIVE: The rights and remedies provided by this Lease are cumulative; and the use of any one right or remedy by either party shall not preclude or waive its right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance or otherwise. SECTION 17.08. WAIVER OF DEFAULT: No waiver by the parties hereto of any default or breach of any Term, condition or covenant of this Lease shall be deemed to be waiver or any other breach of the same or any other Term, condition or covenant contained herein. SECTION 17.09. TIME OF ESSENCE: Time is of the essence of this Agreement and for all undertakings contemplated hereby. 30 SECTION 17.10. NO BROKERAGE COMMISSION: Landlord acknowledges that it may owe brokerage fees to Cushman & Wakefield in accordance with its prior agreements with it. Other than Cushman & Wakefield, Landlord and Tenant each covenant and agree with the other that no realtor, real estate firm or broker is entitled to any commission resulting from the sale of the Leased Premises; and in this regard, each covenant and agree to hold harmless the other from any and all claims or attempted claims resulting. SECTION 17.11. SECURITY GUARANTY: Tenant does hereby acknowledge that it has obtained and delivered to Landlord as additional security for its obligations hereunder, the guaranty of Technitrol, Inc., its parent corporation (hereinafter "Guarantor") in accordance with the Guaranty and Suretyship Agreement, the form of which is attached hereto as Exhibit "C." Tenant does hereby agree that in the event of any default under the Guaranty Agreement, that the same shall constitute a default of this Lease. SECTION 17.12. NONRECORDABILITY: Landlord and Tenant acknowledge to have executed and delivered to each other a Memorandum in the form attached as Exhibit "D" attached hereto and made a part hereof, which shall be recorded at the option of either party hereto. IN WITNESS WHEREOF, the undersigned Landlord and Tenant hereby execute this Agreement as of the day and year first above written. WITNESS: RIDILLA-DELMONT /s/ Joseph Conconnon By: /s/ John M. Ridilla - ------------------------------------ -------------------------------- John M. Ridilla General Partner /s/ Joseph Conconnon By: /s/ P. Richard Ridilla - ------------------------------------ -------------------------------- P. Richard Ridilla General Partner ATTEST: ADVANCED METALLURGY INCORPORATED /s/ Valerie A. Miller By: /s/ James J. Rafferty, Jr. - ------------------------------------ -------------------------------- James J. Rafferty, Jr. President 31 FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE (the "AMENDMENT") is made this 21st day of September, 2001 by and between RIDILLA-DELMONT, a Pennsylvania limited Partnership ("LANDLORD"), and AMI DODUCO, INC., formerly ADVANCED METALLURGY INCORPORATED, a Pennsylvania corporation ("TENANT"). WITNESSETH: WHEREAS, pursuant to that certain Lease Agreement (the "ORIGINAL LEASE") dated October 15, 1991 by and between RIDILLA-DELMONT, as Landlord, and Advanced Metallurgy Incorporated, as Tenant, Landlord leased to Tenant and Tenant rented from Landlord certain premises located in the Municipality of Murrysville, Westmoreland County, Pennsylvania, all as defined in the Original Lease as "Leased Premises," and more particularly described on Exhibit "A" thereto; WHEREAS, pursuant to a certain Guaranty and Suretyship Agreement ("GUARANTY AGREEMENT") dated October 15, 1991 by and between TECHNITROL, INC., as Guarantor, and RIDILLA-DELMONT, as Landlord, TECHNITROL, INC. (hereinafter "GUARANTOR") guaranteed (i) the due and punctual payment of all rents and other payments obligations due Landlord or others by Tenant under the Lease and (ii) the due and punctual performance of all other obligations of Tenant under the Lease; WHEREAS, the parties hereto hereby desire to enter into this Amendment to (i) enlarge the Land; (ii) provide for the construction by Landlord of a 23,000 square foot addition to the Building (the "BUILDING ADDITION") to be leased by Tenant; (iii) extend the Term for an additional period of ten (10) years (the "EXTENDED Term"); (iv) provide for additional rental payments throughout the Extended Term; and (v) provide for Landlord financing of certain improvements to the Building and the Building Addition resulting from any requested changes to the Plans and Specifications (hereinafter defined) for the Building Addition and any requested improvements to the Building, all as set forth hereafter; and WHEREAS, Capitalized terms used, but not defined herein, shall have the meanings ascribed to such terms in the Original Lease. The term "Lease" as used herein shall mean the Original Lease as amended hereby. 1 NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: 1. The recitals set forth above are hereby incorporated into this Amendment as if fully set forth below. 2. The recitals to the Original Lease are amended as follows: A. From and after the Turnover Date (hereinafter defined), the term "Land" shall mean and include all of the land described in Exhibit "A" attached hereto and made a part hereof. B. From and after the Turnover Date, the term "Leased Premises" shall include the Building Addition and the Land (as defined herein) in addition to the Building and Support Facilities. C. From and after the Turnover Date, the term "Building" shall include the Building Addition in addition to the Building (as defined in the Original Lease), and the term "Support Facilities" shall include those Support Facilities serving the Building Addition as well as the Building (as defined in the Original Lease). 3. The following new Section 1.04 is hereby made a part of the Lease: Section 1.04. Extended Term: The Term shall be extended for an additional period of ten (10) years (the "EXTENDED TERM"), commencing on the first day of the month following the Turnover Date and terminating as of the last day of the 120th full month thereafter. 4. The following new Sections 2.01(C), (D), (E) and (F) are hereby made a part of the Lease: 2.01(C). For each calendar month of the original Term after October 31, 2001 and extending to (but not including) the first calendar month of the Extended Term, Tenant shall pay to Landlord monthly rent of $35,061.29, which payments shall be due in advance on the first business day of each calendar month for which such rent is due. 2.01(D). For the first month of the Extended Term through and including the 60th month of the Extended Term, Tenant shall pay to Landlord a total rent of $2,869,102.20, payable in equal monthly installments of 2 $47,818.37, which payments shall be due in advance on the first business day of each calendar month for which such rent is due. 2.01(E). For the 61st month of the Extended Term through and including the 120th month of the Extended Term, Tenant shall pay to Landlord a total rent of $2,972,805, payable in equal monthly installments of $49,546.75, which payments shall be due in advance on the first business day of each calendar month for which such rent is due. 2.01(F). It is understood and agreed that Tenant shall have no obligation to pay any real estate taxes, general and special assessments or any other taxes or assessments for or in connection with the Building Addition or any additional Land leased by Tenant hereby prior to the Turnover Date. 5. Section 2.02 of the Original Lease is hereby deleted in its entirety and the following is substituted therefor: Section 2.02. Termination Date; Extended Term Commencement Date; Extended Term Termination Date: The Termination Date shall be the last day of the calendar month during which the Turnover Date occurs. The Extended Term Commencement Date shall be the first day of the first full calendar month following the Turnover Date. The Extended Term Termination Date shall be 11:59 p.m. on the last day of the 120th calendar month after the Extended Term Commencement Date. From and after the Extended Term Commencement Date, the word "Term" when used in the Lease shall mean the "Extended Term" and the word "Termination Date" shall mean the "Extended Term Termination Date." 6. The following new Sections 3.09, 3.10 and 3.11 are hereby made a part of the Lease: Section 3.09 Construction by Landlord: Landlord shall cause the Building Addition to be constructed in accordance with the Outline Specifications and the Site Plan Drawing No. S-1 prepared for Modal Inc. dated June 21, 2001 attached hereto and made a part hereof as Exhibits "B" and "C" respectively (collectively, the "PLANS AND SPECIFICATIONS"). Notwithstanding the foregoing, Landlord shall not be responsible for construction of the items listed as "exclusions" on Exhibit "B." The Building Addition shall be completed in accordance with the requirements of the Plans and Specifications, in a good and workmanlike manner, lien 3 free, and in accordance with all applicable laws, rules, ordinances, codes and the like of any and all governmental and quasi-governmental authorities having jurisdiction over Landlord, Tenant, the Building or any construction by Landlord (hereinafter "LAWS"), including, but not limited to, any Laws pertaining to building codes and zoning matters. Landlord, at its sole cost and expense, shall obtain any and all permits, licenses and the like required for or in connection with the construction of the Building Addition. Section 3.10 Landlord's Obligations; Turnover Date: (a) Landlord shall complete the Building Addition, including placing all Building Addition utility and mechanical systems in good and proper working order and obtaining a Certificate of Occupancy or other like certificate or permit therefor, by no later than the 180th full calendar day following the date of issuance of a building permit for the Building Addition by the Municipality of Murrysville, but in any event on or before May 5, 2002. For purposes of this Section 3.10, the Building Addition shall be deemed completed on the date that Landlord's duly licensed architect certifies in writing to Tenant that the Building Addition has been fully completed in accordance with the Plans and Specifications, as the same may be amended by the parties, including, without limitation, placing all building and mechanical systems for the Building Addition in good and proper working order in accordance with all applicable laws (the "TURNOVER DATE"). (b) In the event that a building permit is not obtained by Landlord from the Municipality of Murrysville by October 5, 2001, then Tenant shall have the right to terminate this Amendment as it relates to the Building Addition only, provided that such termination is in writing and occurs prior to issuance of such building permit. Notwithstanding any such termination, Tenant shall remain obligated to pay the full amount of Change Order No. 1, as described in Paragraph 9 hereof, within thirty (30) days of receipt of such change order. In the event that a building permit is not obtained by Landlord from the Municipality of Murrysville by November 5, 2001 and Tenant has not terminated this Amendment pursuant to the preceding sentence, then Landlord shall have the right to terminate this Amendment as it relates to the Building Addition only, provided that such termination is in writing and 4 occurs prior to the issuance of such building permit. In the event that this Amendment is not terminated with respect to the Building Addition pursuant to the preceding two sentences and the Building Addition is not completed by May 5, 2002 and a Certificate of Occupancy or other like permit (without any material conditions thereto) is not issued for the Building Addition, then monthly rent for the Building Addition shall be abated until the later of (i) Turnover Date or (ii) the issuance of a Certificate of Occupancy or other like permit (without any material conditions thereto) for the Building Addition, and in addition thereto Tenant shall be entitled to a rent credit (the "RENT CREDIT") against the monthly rent first coming due for the Extended Term in an amount equal to the sum of $261.51 multiplied by the number of days between May 5, 2002 and the later of (i) the Turnover Date or (ii) the issuance of a Certificate of Occupancy or other like permit (without any material conditions thereto) for the Building Addition. Notwithstanding the foregoing, in the event that the Building Addition is not completed by June 5, 2002 and a Certificate of Occupancy or other like permit (without any material conditions thereto) is not issued for the Building Addition, then the Rent Credit shall be increased to $523.02 multiplied by the number of days between June 5, 2002 and the later of (i) Turnover Date or (ii) the issuance of a Certificate of Occupancy or other like permit (without any material conditions thereto) for the Building Addition. In the event that this Amendment is terminated with respect to the Building Addition pursuant to this Paragraph 3.10(b), then all of the other terms, covenants and conditions contained in the Original Lease, as amended hereby and not relating to the Building Addition shall remain in full force and effect, except that the rent (excluding any Additional Rent) payable for the Extended Term shall be as follows: (i) For each calendar month of the original Term after October 31, 2001 and extending to (but not including) the first day of May, 2002, Tenant shall pay to Landlord monthly rent of $35,061.29, which payments shall be due in advance on the first business day of each calendar month for which such rent is due. (ii) For period commencing as of May 1, 2002 and expiring as of April 30, 2007, Tenant shall pay to Landlord a total rent of $2,391,852.50, payable in equal monthly installments of 5 $39,864.21, which payments shall be due in advance on the first business day of each calendar month for which such rent is due. (iii) For the period commencing as of May 1, 2007 and expiring as of April 30, 2012, Tenant shall pay to Landlord a total rent of $2,478,305, payable in equal monthly installments of $41,305.08, which payments shall be due in advance on the first business day of each calendar month for which such rent is due. (c) Notwithstanding the provisions of subparagraph (b) above, in the event that Landlord does not complete required repairs to repaving of the parking lot by the Turnover Date, the same shall not be reason for imposition of the Rent Credit provided that the aforementioned repairs and repaving are completed by May 15, 2002. Also, Landlord's work to repair and repave the parking lot shall not cause disruption or interference with Tenant's business at the Leased Premises. Section 3.11 Additional Improvements Financing: (a) In addition to the improvements listed and described on the Plans and Specification, Landlord agrees to complete any other improvements to the Building and/or the Building Addition (the "ADDITIONAL IMPROVEMENTS") which are requested by Tenant in writing. Any such additions shall be memorialized in a writing signed by Landlord and Tenant and shall be considered a "Change Order" from the Plans and Specifications. All Change Orders shall set forth in detail the nature of the work to be performed and shall include the cost charged therefor. (b) On or before the seventh day of the each calendar month following the commencement of construction of the Building Addition, Landlord shall submit to Tenant a report on construction expenditures for the Additional Improvements constructed through the last day of the previous month, along with an invoice (the "ADDITIONAL IMPROVEMENTS INVOICE") for the cost of the total amount of said expenditures plus the accrued interest due thereon at the Applicable Interest Rate (hereinafter defined). Tenant shall pay to Landlord the amount of accrued interest only (at the 6 Applicable Interest Rate) on Additional Improvements within ten (10) days of receipt of an invoice therefor. Such interest shall accrue from the date of any construction expenditure by Landlord through the date of any Additional Improvements Invoice therefor. From and after the Turnover Date, Tenant shall no longer be invoiced for any such interest. (c) In addition to the rent payments pursuant to Sections 2.01(D) and (E) above, commencing as of the 1st calendar month of the Extended Term through and including the 120th calendar month of the Extended Term, Tenant shall also pay, as Additional Rent, on the first day of each of the foregoing calendar months, the amount (the "ADDITIONAL IMPROVEMENTS FINANCING") derived by amortizing the total aggregate amount of the cost of the work listed on each Additional Improvements Invoice, in an amount not to exceed $300,000, over 120 calendar months, at an interest rate equal to the "prime rate" as published by PNC Bank on the business day immediately prior to the Turnover Date (the "PNC PRIME"), plus one-half of one percent (the "APPLICABLE INTEREST RATE"). In the event that the total cost of the Additional Improvements exceeds $300,000 in the aggregate, the amount of any overage shall be paid by Tenant to Landlord within 10 days of Tenant's receipt of the last of the Additional Improvements Invoices. 7. Article 5 to the Original Lease is hereby amended as follows: (a) Section 5.01(A) is hereby amended by adding the following at the end thereof: Notwithstanding the foregoing, Tenant shall in no event be required to maintain fire and extended coverage insurance in an amount in excess of the full replacement cost of the Building (including the Building Addition). Upon request by Landlord, but no more frequently than one (1) time during any twelve (12) month period throughout the Term and the Extended Term (as the same may be extended), Tenant shall provide Landlord with a written statement of the value assigned to the Building (including, if applicable, the Building Addition) for insurance rating purposes. Commencing on the Turnover Date and for a period of 12 months thereafter, the minimum amount of insurance required to be placed by Tenant shall be $6.4 Million. Thereafter, and throughout the remainder of 7 the Term and Extended Term the amount of insurance shall at all times be the full replacement cost of the Building and the Building Addition. (b) The name "John M. Ridilla" is hereby deleted from section 5.02 of the Original Lease and the name "John B. Ridilla" is hereby substituted (c) The term "required to be maintained by the parties hereto" is hereby inserted after the words "policies of insurance" in Section 5.04. (d) Notwithstanding anything contained in Paragraph 5.06(c) of the Original Lease to the contrary, in the event of a Major Casualty (hereinafter defined) within the last three (3) years of the Extended Term, Landlord shall have no obligation to repair, replace and/or restore the Leased Premises, unless Tenant, within thirty (30) days of the casualty, agrees in writing to extend the Extended Term so that the same shall expire as of ten (10) years from the completion of the required repairs, replacements and/or restoration to the Leased Premises, in which case Landlord shall be obligated to perform the required repairs, replacements and/or restoration of the Leased Premises. In the event that the parties extend the Extended Term as aforesaid, then all of the terms, covenants and conditions contained in the Original Lease, as amended hereby, shall remain in full force and effect, except that the rent (excluding any Additional Rent) payable for any period of time beyond the original Extended Term Expiration Date shall be at a rate as agreed upon by Landlord and Tenant. In the event that Tenant does not agree to extend the Extended Term as aforesaid, then Landlord agrees that it shall nevertheless notify Tenant within forty-five (45) days of the casualty whether it intends to repair, replace and/or restore the Leased Premises. In the event that Landlord notifies Tenant within such forty-five (45) day period that it does not intend to repair, replace and/or restore the Leased Premises (or in the event that Landlord fails to so notify Tenant within such forty-five (45) day period), then (i) this Lease shall terminate as of the date of the casualty; (ii) all rent shall be adjusted to the date of such casualty and Tenant shall be refunded any amounts paid for periods after the date of such casualty; (iii) Tenant shall pay any unpaid Additional Improvements Financing to Landlord within sixty (60) days of the date of such casualty; and (iv) Tenant shall be afforded a reasonable period of time, commencing as of the date that Landlord notifies Tenant that it will not repair, replace and/or restore the Leased Premises, or in the absence of any such notice, commencing as of forty-five (45) days after the date of the casualty (not to exceed ninety [90] days in the aggregate), in which to remove all of Tenant's Trade Fixtures and Equipment from the Leased Premises and to fully vacate the Leased Premises. For purposes hereof, the term "Major Casualty" shall mean a casualty which renders 50% or more of the Leased Premises unusable for Tenant's intended business use. 8 (e) The words "Tenant's Trade Fixtures and Equipment" in Section 5.07 are hereby replaced with the words "all insured items, other than those in the Landlord's interest." 8. The following new Section 17.13 is hereby made a part of the Lease: Section 17.13. Nothing in this Amendment shall be deemed to apply to work completed for and on behalf of Tenant by Modal, Inc. (the "IT Work") as referenced in Modal's March 20, 2001 proposal (the "MODAL PROPOSAL"). Notwithstanding the foregoing, Landlord hereby grants Tenant the right to cause the IT Work to be performed within the Leased Premises, and, in consideration therefor, Tenant agrees to pay Modal the sum of $12,515 for the IT Work completed as of the date hereof. The IT Work shall be performed in accordance with the provisions of Article 9 of the Original Lease. The IT Work shall be deemed either "Trade Fixtures and Equipment" or "Non-trade Fixtures" within the meaning of Section 9.01 and 9.02 of the Original Lease, respectively, depending on the classification of improvements identified in the IT Work. 9. It is acknowledged by the parties that the writing titled "Change Order No. 1" dated July 27, 2001 attached hereto and made a part hereof as Exhibit "D" shall be deemed a Change Order in the amount of $93,692.00 within the meaning of Section 3.11 (a) hereof; and, that the work described on Change Order No. 1 shall be deemed "Additional Improvements" within the meaning of Section 3.11 (a) hereof, notwithstanding the fact that the majority of the work described thereon has already been performed and that the bulk of the expenditures contemplated therein have already been incurred by Landlord. 10. By joining in this Amendment, Guarantor acknowledges its consent to this Amendment and agrees that the provisions of the Guaranty Agreement attached to the Original Lease shall remain in full force and effect and shall extend to all of the obligations and duties of Tenant set forth in the Original Lease, as amended hereby, throughout the Term and the Extended Term. 11. Within 60 days of the Turnover Date, Landlord and Tenant shall execute and record in the office of the Recorder of Deeds in and for Westmoreland County, Pennsylvania, a Memorandum of this Amendment, in form and substance reasonably acceptable to the parties, which memorandum shall set forth, inter alia, the Extended Term Commencement Date and the Extended Term Expiration Date. 9 12. Except as modified hereby, the Original Lease shall remain in full force and effect and is hereby ratified and affirmed. In the event of a conflict between the terms, covenants and conditions of this Amendment, and the terms, covenants and conditions of this Original Lease, the terms, covenants and conditions of this Amendment shall be controlling. 13. The terms of this Amendment shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. 14. This Amendment, including the Joinder of Guarantor attached hereto and made a part hereof by this reference, may be signed by the parties in two or more counterparts, each of which shall be deemed to be an original, and all of which taken together shall constitute one and the same document. Receipt by telecopier of a signed copy of this Amendment and the Joinder of Guarantor shall be deemed receipt of the original document. 15. In the event that either of the parties exercises its right to terminate this Amendment as it relates to the Building Addition only pursuant to Paragraph 3.10(b) hereof, then the term "Turnover Date" when used herein, where applicable, shall be deemed to mean May 1, 2002. [CONTINUED ON FOLLOWING PAGE] 10 IN WITNESS WHEREOF, Landlord and Tenant and Guarantor have executed this First Amendment to Lease as of the day and year first above written. WITNESS: RIDILLA-DELMONT, a Pennsylvania limited partnership /s/ James M. Kolh By: /s/ P. Richard Ridilla - ------------------------------ -------------------------------------- Name: P. Richard Ridilla, Title: General Partner ATTEST: AMI DODUCO, INC. /s/ Albert Thorp, III By: /s/ Gunther Hehn - ------------------------------ -------------------------------------- Name: Gunther Hehn Title: VP & Segment Controller 11 JOINDER OF GUARANTOR Guarantor hereby joins in this First Amendment to Lease dated September 21, 2001 by and between Ridilla-Delmont, as Landlord, and AMI Doduco, Inc., as Tenant, solely to acknowledge its consent hereto and its agreement to be bound by the provisions of Section 10 hereof. ATTEST: TECHNITROL, INC. By: /s/ Albert Thorp, III - ---------------------------------- ------------------------------------ Name: Albert Thorp, III Title: VP-Finance & CFO EXHIBIT "A" Legal Description of Land ALL that certain lot or parcel of land situate in the municipality of Murrysville, Westmoreland County, Pennsylvania, being more particularly bounded and described as follows: FIRST: BEGINNING at a point on the northerly line of a private fifty (50) foot roadway known as Corporate Drive, at corner of other lands of Ridilla-Delmont, being Parcel 2 of the Murry Corporate Park, and which was previously leased by Ridilla-Delmont to EPI Architectural Systems, Inc., pursuant lease, a memorandum of which was dated May 21, 1986, and duly recorded in the Office of the Recorder of Deeds of Westmoreland County in Deed Book Volume 2669, page 267. Thence from said point of beginning along line of Parcel 2, North 39(degree) 30' 00" West, 736.6 feet to a point on other lands of Cornerstone Ministries, Inc.; thence along line of said Ministries, North 51(degree) 54' 30" East, 467.78 feet to a point on the southerly right of way line of the William Penn Highway, also known as U.S. Route 22 (LR 187); thence along said right of way line, South 63(degree) 30' 00" East, 330.01 feet to a point; thence along same, South 63(degree) 30' 00" East, 341.73 feet to a point at corner of lands now or formerly Storeall, Inc.; thence along said line of said Storeall, South 24(degree) 45' 00" East, 38.34 feet to a point at corner of lands of Parcel 1 in the aforementioned Murry Corporate Park Plan; thence along line of Parcel 1, South 15(degree) 00' 00" West, 214.15 feet to a point; thence along same, South 50(degree) 30' 00" West, 203.75 feet to a point in the center of the aforementioned Corporate Drive; thence along the center line of the aforementioned Corporate Drive, North 39(degree) 30' 00" West, 50.00 feet to a point; thence along same, South 50(degree) 30' 00" West, 352.99 feet to a point, the place of beginning. TOGETHER with the right to use Corporate Drive, a private roadway fifty (50) feet in width as the same abuts on the southerly side of the above described parcel and extends from Township Road 706 on the West, for a distance of 663 feet, more or less, on a line North 50(degree) 30' 00" East from said Township Road 706, and terminating on the easterly side of the above described parcel. THE above-listed parcel is Parcel 3 of Murry Corporate Park Plan No. 4, Lot Line Revision of Parcels 1 and 3, Municipality of Murrysville, Westmoreland County, Pennsylvania as prepared by Civil & Environmental Consultants, Inc. under revision date of July 1, 2001. [LETTERHEAD FOR MODAL, INC] OUTLINE SPECIFICATIONS AMI DODUCO ADDITION TO EXISTING EXPORT PLANT May 31, 2001 SCOPE OF WORK: 1) Reinforced concrete footings & 12" concrete block foundation walls to minimum 3' below grade. Permiter insulation is 2" expanded polystyrene from top of footer to bottom of floor slab & extended underfloor for 12". Foundations have been designated with soil bearing pressure of 3,000 PSF. 2) Reinforced concrete floor system to be 6" concrete with welded wire mesh over vapor barrier with 4" stone base. 3) Butler Manufacturing Company's pre-engineered steel building 100' wide x 230' long x 19' high. The building will be designed for a 30# roof snow load, a 10# collateral load for ceiling, lights, etc., and a 70 MPH wind load. 4) Butler Manufacturing Company's MR-24 Standing Seam Roof System. 24-ga. aluminum-zinc alloy coated steel & concealed fasteners. Exposed fasteners located at splices & eaves. Roof system provided with gutters, downspouts, trims & 6" thick fiberglass blanket insulation with white reinforced polypropylene facing. Roof insulation to be rated R-19. 5) The exterior building walls will be constructed of masonry and metal siding. The metal siding will be Butler Manufacturing Company's Stylwall siding insulated with 4" fiberglass with polypropylene facing R-13. Masonry walls will be white splitface block. Siding, block and trim will match existing as close as possible. 6) All Exterior mandoors & frames to be hollow metal with required exit & entrance hardware. 7) Three (3) 8 x 10 overhead doors will be relocated to new addition. 8) Heating will include Two (2) 400,000 BTU unit heaters and related gas piping. 9) Electrical construction includes: metal halide light fixtures with acrylic diffusers, (22) receptacles and power to unit heaters. New addition power to be fed from existing panels. New panel for addition to be 100 amp. 10) Sprinkler construction will include coverage for ordinary hazard. The ordinary hazard may change if the Fire Marshall determines the contents of the building to be high hazard. Bid includes installing a new riser next to existing and extending to addition. EXHIBIT "B" May 31, 2001 Page Two SCOPE OF WORK (CONTINUED): 11) We will add new topping to existing paving on the north side of the existing building. 12) We have included all required piping and catch basins to direct all site water to the storm water system. 12) Building permit, State approval and related architectural fees. 13) Mechanical and electrical engineering for items included in this proposal will be performed by subcontractors. THE FOLLOWING ITEMS ARE EXCLUDED FROM THIS PROPOSAL: 1) Removal/reinstallation of all equipment within addition area. 2) Removal of existing exterior wall at addition tie-in. 3) Concrete floor sealer/coatings. 4) Concrete foundations for owner furnished equipment. 5) Painting of pre-engineered building, exposed plumbing, sprinkler, HVAC & electrical work, and interior concrete block. 6) Interior/exterior fencing. 7) Pre-finished interior liner panel @ pre-engineered building. 8) Trench drains/floor drains @ manufacturing area. 9) Water supply for owner furnished equipment. 10) Exhaust fans/louvers and make-up air for manufacturing area. 11) Exhaust/dust collection for owner furnished equipment. 12) Power requirements for owner furnished equipment. 13) Security System. 14) Voice, data and telephone systems. 15) Lightning protection. 16) All plumbing construction. 17) Any items not specifically mentioned in above Scope of Work. EXHIBIT "B" CONT. [SITE PLAN DRAWING NO. S-1 APPEARS HERE] Exhibit "C" [LETTERHEAD FOR MODAL, INC.] July 11, 2001 VIA FAX 724/733-2880 AMI Doduco Murry Corporate Park 1003 Corporate Drive Export, PA 15632 Attention: Fred Nincke RE: FIRST & SECOND FLOOR OFFICE RENOVATIONS, REVISION #2 Dear Fred: Please review the following proposal for renovations to the First and Second Floors of your Murry Corporate Park Facility: A) EXECUTIVE AREA: 1) New office walls as shown on our drawing A-101. Walls to be constructed of metal studs, 1/2" gypsum board with 3" sound insulation. We will paint and wallpaper the new walls, strip and repaper the existing walls for Seven (7) new offices and 80 LF +/- of hallway. 2) New ceiling tile and grid in Four (4) offices, re-work ceiling to match in new hallway. 3) New carpet in Six (6) offices and 80 LF+/- of hallways. Existing base to remain. Patch wood base in hall, wood base in Four (4) offices (reuse existing where possible). 4) We will reuse existing doors where possible and supply new as required. 5) Sprinkler system will be reworked as required. 6) Electrical construction will include: a) Install approx. Twenty-Five (25) duplex receptacles. b) Four (4) data stubs. c) Four (4) single pole switches. d) Two (2) three-way switches. e) Six (6) new light fixtures. f) Relocate Ten (10) light fixtures. 7) HVAC construction includes reworking existing system as required. We will balance the existing system in this area as close as possible with existing equipment. 8) PA Dept. of Labor & Industry approval and local occupancy permit. TOTAL COST FOR RENOVATIONS TO EXECUTIVE AREA: $43,400.00 EXHIBIT "D" July 11, 2001 Attention: Fred Nincke Page Two RE: FIRST & SECOND FLOOR OFFICE RENOVATIONS, REVISION #2 B) FIRST FLOOR OFFICE - SOUTH: 1) New office walls for Conference Room and open Office Area as shown on our Drawing A-101 to be constructed of metal studs, 1/2" Durasan (vinyl covered gypsum) with 3" sound insulation. 2) Rework ceiling to match. 3) New carpet in new offices, existing offices and hallway. Existing rubber base to remain. New rubber base as required. Patch VCT in open office area. 4) We will re-use existing doors where possible and supply new as required. 5) Sprinkler system to be reworked as required. 6) Electrical construction will include the following: a) Install approximately (29) duplex receptacles. b) (8) Data stubs. c) (3) Single pole switches. d) (4) Three-way switches. e) Relocate existing light fixtures. 7) HVAC to be reworked and balanced as close as possible with existing equipment. 8) PA Dept. of Labor & Industry approval and local occupancy permit. TOTAL COST FOR RENOVATIONS TO FIRST FLOOR OFFICE - SOUTH: $39,008.00 C) SECOND FLOOR RENOVATIONS: 1) Construction of One (1) 15' x 29' room with 6' opening (no door). Walls will be constructed of similar material as adjacent stud walls. 2) Cut Three (3) openings in existing walls, trim with Durasan. 3) Electrical construction includes: a) Install (28) 120-volt receptacles. b) Install (5) data stubs. c) Relocate (4) light fixtures. d) Install (4) new light fixtures. e) Install (1) 3-phase 200-amp panel adjacent to the existing panel. This panel will be served from the existing feeder. This work will require a power outage of approximately four to five hours. EXHIBIT "D" CONT. July 11, 2001 Attention: Fred Nincke Page Three RE: FIRST & SECOND FLOOR OFFICE RENOVATIONS, REVISION #2 C) SECOND FLOOR RENOVATIONS (CONTINUED): 4) We will patch existing VCT as required with material furnished by AMI. NOTE: This area includes no work on ceilings, sprinkler or HVAC. TOTAL COST FOR SECOND FLOOR RENOVATIONS: $11,284.00 THE FOLLOWING ITEMS ARE EXCLUDED FROM THIS PROPOSAL: 1) Moving or replacing any furniture or equipment. We will require free and clear access to work area. 2) Any new HVAC equipment required to balance system. We will require access to each area in its entirety to allow work progress at a reasonable pace. We will work with you to make this renovation move smoothly and disturb your operations as little as possible. This proposal is firm for a period of Thirty (30) Days, afterwhich Modal, Inc. reserves the right to withdraw it for re-evaluation made necessary by modifications to labor and/or material cost increases. Thank you for the opportunity to provide this proposal. If you have any questions, please give me a call. If acceptable, please issue a purchase order, or sign, date and return a copy of this letter. Sincerely yours, MODAL, INC. /s/ Michael E. Dilla Michael E. Dilla Project Manager cc: Job File Accepted By: /s/ Gunther Hehn --------------------------------------------- Name/Title: Gunther Hehn, VP & Segment Controller ---------------------------------------------- Date: July 27, 2001 ---------------------------------------------------- EXHIBIT "D" CONT. ALL that certain lot or parcel of land situate in the Municipality of Murrysville, Westmoreland County, Pennsylvania, being more particularly bounded and described as follows: BEGINNING at a point on the Northerly line of a private fifty (50) foot roadway known as Corporate Drive, at corner of other lands of Ridilla-Delmont, being Parcel 2 of the Murry Corporate Park, and which was previously leased by Ridilla-Delmont to EPI Architectural Systems, Inc., pursuant lease, a memorandum of which was dated May 21, 1986, and duly recorded in the Office of the Recorder of Deeds of Westmoreland County in Deed Book Volume 2669, page 267. Thence from said point of beginning along line of Parcel 2, North 39(degree) 30' West, 736.6 feet to a point on other lands of Cornerstone Ministries, Inc.; thence along line of said Ministries, North 51(degree) 54' 29" East, 353.11 feet to a point; thence through other lands of Ridilla-Delmont, South 39(degree) 30' East, 727.92 feet to a point on the Northerly side of Corporate Drive; thence along the Northerly line of said Corporate Drive, South 50(degree) 30' West, 353.00 feet to a point, the place of beginning. TOGETHER with the right to use Corporate Drive, a private roadway fifty (50) feet in width as the same abuts on the Southerly side of the above described parcel and extends from Township Road 706 on the West, for a distance of 663 feet, more or less, on a line North 50(degree) 30' East from said Township Road 706, and terminating on the Easterly side of the above described parcel. THE ABOVE described parcel is in accordance with Plan of Survey of Richard F. Territ, Registered Surveyor, dated July 21, 1987. EXHIBIT "A" Council: EDWARD W. YODER, President - RICHARD P. KOLE, Vice President - JAMES G. EARHART, SR. COLLEEN LLOYD - J.M. HALL, JR. - WILLIAM P. YANT, JR. - ROBERT J. BROOKS MUNICIPALITY OF MURRYSVILLE "First Home Rule Community in Westmoreland County" P.O. BOX 127 BETTY J. HOOVER, Mayor MURRYSVILLE, PA. 15668 BETSY AIKEN, Chief Administrator 2885 SCHOOL ROAD SOUTH MUNICIPAL BUILDING R.D. 3, EXPORT, PA. 15632 PHONE (412) 327-2100 October 7, 1991 Attn: Joe Comcamnom Ridilla-Delmont P.O. Box 472 Latrobe, PA 15650 RE: Advanced Metallurgy, Inc. Dear Mr. Comcamnom: I am writing to you to confirm our conversation in the office today regarding the certificate of occupancy, to be issued by the Municipality of Murrysville in regards to the old David Weiss Building. Your proposal for the new type of business to be located in this building is a permitted use in the M-1 Zoning District of the Murry Corporate Industrial Park. Upon completion of the renovations a certificate of occupancy will be issued by the Municipality of Murrysville. Should you have any further questions regarding this occupancy, do not hesitate to contact this office between the hours of 8:00 a.m. and 5:00 p.m. Respectfully, /s/ Alan D. Latta Alan D. Latta Code Enforcement Officer ADL/rg cc: File Exhibit "B" GUARANTY AND SURETYSHIP AGREEMENT THIS GUARANTY AND SURETYSHIP AGREEMENT ("Agreement"), dated as of October 15, 1991, and given by TECHNITROL, INC., a corporation having a principal office or place of business at 1210 Northbrook Drive, Suite 385, Trevose, PA 19053 (hereinafter "Guarantor"), and delivered by Guarantor to RIDILLA-DELMONT, a Pennsylvania Limited Partnership (hereinafter called "Landlord"). W I T N E S S E T H T H A T: WHEREAS, concurrently herewith, Advanced Metallurgy, Inc., a Corporation (hereinafter called "Tenant") has entered into a Lease (hereinafter "Lease") with Landlord under which Tenant will lease premises located in the municipality of Murrysville, Westmoreland County, Pennsylvania, all as described in the Lease and all as in accordance with the terms of the Lease; and WHEREAS, Guarantor is the sole stockholder and desires to secure the obligations of the Tenant under the Lease in the manner hereinafter set forth. NOW, THEREFORE, for and in consideration of the grant of the Lease unto Tenant, and other good and valuable consideration, receipt of which being acknowledged hereunder, and intending to be legally bound hereby, Guarantor covenants and agrees as follows: ARTICLE I Section 1.01. Without limitation or restriction upon any of the other covenants undertaken by Guarantor in this Guaranty and Suretyship Agreement (hereinafter "Agreement"), Guarantor hereby: (a) unconditionally and irrevocably guarantees and becomes surety to the Landlord: (i) for the due and punctual payment of all rents and other payment obligations due Landlord or others by Tenant under the Lease; and (ii) for the due and punctual performance of all obligations of Tenant under the Lease as otherwise set forth in the Lease; and (b) in the event of non-payment and/or non-performance by Tenant, covenants with Landlord to pay punctually the obligations stated in (a)(i) above in United States currency as and when the same become payable, and to perform fully and faithfully the obligations referred to in (a)(i) above, and to pay all the expenses which may be incurred by Landlord, including but not limited to reasonable Attorney's Fees and expenses, in its efforts, required or otherwise, to collect and/or enforce performance of any or all of such obligations or in enforcing any right hereunder. ARTICLE II Section 2.01. Guarantor expressly: (i) waives any action taken or omitted in reliance hereon and any presentment, demand, protest or notice of any kind, and (ii) agrees that the Lease may be modified, amended and supplemented in any manner, including the renewal or extension thereof without the consent of Guarantor, and (iii) agrees that no such modification, amendment, Exhibit "C" renewal or extension, nor any other indulgence, shall release, affect or impair the liability of Guarantor created under this Agreement. Section 2.02. The obligations of Guarantor hereunder shall be absolute and unconditional and shall remain in full force and effect with regard to and shall not be released, discharged or in any way affected by: (i) any amendment or modification of or supplement to the Lease; (ii) any bankruptcy, insolvency, arrangement, composition, assignment for the benefit of creditors or similar proceeding commenced by or against the Tenant; (iii) any failure to perfect or continue perfection of, or release or waiver of, any rights given to the Landlord in any property as security for the performance of any of the Tenant's obligation under the Lease; (iv) the dissolution of the Tenant; (v) any defense that may arise by reason of the failure of the Landlord to file or enforce a claim against the estate of the Tenant in any bankruptcy or other proceeding; (vi) the voluntary or involuntary liquidation, dissolution, sale of all or substantially all of the property of the Tenant, marshaling of assets and liabilities or other similar proceeding affecting the Tenant or any of its assets; (vii) the release of the Tenant from performance or observance of any of the agreements, covenants, terms or conditions contained in the Lease by operation of law; or (viii) any sale or other transfer of any of the property or assets of the Tenant. Section 2.03. The obligations of Guarantor hereunder may be enforced notwithstanding any other right or remedy which Landlord may have against the Tenant or any other person or entity. It shall not be necessary to the enforcement of any of the obligations of the Guarantor hereunder that any rights or remedies of Landlord against the Tenant or others, or against any property taken as security for any of the payments due under the Lease, be pursued to any extent whatever. This Agreement constitutes an agreement of suretyship as well as of guaranty, and Lender may pursue its rights and remedies under this Agreement and under the Lease in whatever order, or collectively, and shall be entitled to payment and performance hereunder notwithstanding the terms of the Lease and notwithstanding any action taken by Landlord or inaction by Landlord to enforce any of its rights or remedies against any other person, entity or property whatsoever. Section 2.04. Except as to any rights the Guarantor may have against the Tenant for any payments made by that Guarantor, including without limitation, the right of subrogation, reimbursement, exoneration, contribution and indemnity, the Guarantor further hereby waives, surrenders and agrees not to claim or enforce: (i) any right of subrogation, reimbursement, exoneration, contribution or indemnity with respect to any right or claim of any nature whatsoever of the Landlord against the Tenant or any other person arising under the Lease (whether arising directly or indirectly, by operation of law, contract or otherwise), or (ii) any right to require the marshaling of any assets of the Tenant. ARTICLE III Section 3.01. The Guarantor hereby represents, warrants and certifies that any representations and warranties made by the Guarantor to the Landlord or its agents are true and correct on the date hereof. Section 3.02. This Guaranty has been duly and validly executed and delivered by Guarantor and constitutes legal, valid and binding obligations of the Guarantor, enforceable in 2 accordance with the terms hereof, except as the enforceability hereof may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights. Section 3.03. The Guarantor Warrants that neither (a) the execution and delivery of this Guaranty, (b) the consummation of the transactions herein contemplated, nor (c) the performance of or compliance with the terms and conditions hereof will (1) violate any law, the violation of which could have a material adverse effect upon Guarantor; or (2) conflict with or result in a breach of or default under any agreement or instrument to which the Guarantor is a party, which breach, violation or default would have a material adverse effect upon Guarantor. Section 3.04. There is no pending or, to the best knowledge of Guarantor, threatened proceeding by or before any official body against or affecting the Guarantor which, if adversely decided, would have a material adverse effect on the business, operations or conditions, financial or otherwise, of Guarantor or on the ability of the Guarantor to perform its obligations under this Guaranty. Section 3.05. The Guarantor hereby covenants to Landlord that in the event that at any time during which this Guaranty is in effect, its stock is no longer is traded on the open market, that within thirty (30) days after written request from Landlord: (a) Guarantor shall furnish to Landlord its most recent annual financial statement, and other information as may be reasonably required by Landlord. (b) Nothing contained within the financial statements required under Section 3.05(a) shall be construed in any matter to constitute a default of this Guaranty; and provided further, that Landlord by accepting the financial statements will covenant that neither the financial statements nor any terms thereof shall be disclosed by Landlord for any purpose without the prior written consent of the Guarantor. ARTICLE IV Section 4.01. If payment of any portion of the amounts due by Tenant under the Lease is made by Tenant or Guarantor, the liability of Guarantor hereunder shall continue and remain in full force and effect, if all or any part of said payment is recovered as a preference or fraudulent transfer under any applicable bankruptcy or insolvency law. If a default shall occur and be continuing under the Lease, and declaration of default or acceleration under or with respect to the Lease at such time shall be prevented by reason of the pendency against Tenant of a case or proceeding under any bankruptcy or insolvency law, the Guarantor agrees that, for purposes of this Agreement and the respective obligations hereunder, the provisions of the Lease shall be deemed to have been declared in default and accelerated with the same effect as if the Lease had been declared in default and accelerated in accordance with the terms thereof, and the Guarantor shall forthwith pay any amounts then due and owing and perform their other obligations hereunder without further notice or demand. In the event of Bankruptcy of the Tenant, and thereafter Tenant or the Trustee in Bankruptcy should determine that the Lease should be assumed, then the same shall be considered a cure of the default. 3 Section 4.02. Landlord and Guarantor agree that the laws of the Commonwealth of Pennsylvania shall apply to this Guaranty, and that in the event of non-payment under Section 4.01, Landlord may bring an action against Guarantor for the amount of such non-payment in any Court of record in Pennsylvania; and Guarantor does hereby submit to the jurisdiction of the same. In the event of judgment thereafter, Guarantor waives all exemptions from levy and sale of any property that now is or hereafter may be exempted by law. Section 4.03. If Landlord employs counsel to enforce this Agreement by suit or otherwise, Guarantor will reimburse the Landlord, upon demand, for all expenses incurred in connection therewith (including, without limitation, Reasonable Attorneys' Fees), only if suit is actually instituted, and Landlord thereafter is the prevailing party. Section 4.04. The Guarantor irrevocably: (a) agrees that Landlord, its successors and assigns, may bring suit, action or other legal proceedings arising out of this Agreement or the transactions contemplated hereby in the court of the Commonwealth of Pennsylvania in Westmoreland County, Pennsylvania or the courts of the United States for the Western District of Pennsylvania; (b) consents to the jurisdiction of each such court in any such suit, action or proceeding; and (c) waives any objection which Guarantor may have to the laying of the venue of any such suit, action or proceeding in any of such courts. ARTICLE V Section 5.01. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the Commonwealth of Pennsylvania, and any Federal laws that may apply. Section 5.02. No failure or delay on the part of the Landlord in exercising any of its rights, power or privileges under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other future exercise thereof or the exercise of any other right, power or privilege. The rights and remedies of the Landlord under this Agreement are cumulative and not exclusive of any rights or remedies which the Landlord would otherwise have under the Lease. Section 5.03. The provisions of this Agreement shall be binding upon the Guarantor, its respective administrators, successors and assigns, and shall inure to the benefit of the Landlord, its successors and assigns. Section 5.04. This Agreement shall not be amended, modified, waived, changed, discharged or terminated except by an instrument in writing signed by the party against whom enforcement of such amendment, modification, waiver, change, discharge or termination is sought. Section 5.05. All notices, requests, demands, directions and other communications (collectively "notices") under the provisions of this Agreement shall be in writing (including facsimile communication) unless otherwise expressly permitted hereunder and shall be sent by United States Certified or Registered Mail (return receipt requested), or First Class Express Mail, or by facsimile, in all cases with charges prepaid, and any such properly given notice shall be effective when received. All notices shall be sent to the applicable party addressed, if to the 4 Landlord at P.O. Box 472, Latrobe, Pennsylvania 15650, Attention: Joseph Concannon, and, if to Guarantor, at 1210 Northbrook Drive, Suite 385, Trevose, Pennsylvania 19053, Attention: President. Provided that either of the above shall have the right by written direction to all the other parties to this Agreement to change the address for notices hereunder. Section 5.06. If any term or provision of this Agreement or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to person or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. Section 5.07. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. Section 5.08. This Agreement will remain in effect until fulfillment of all of Tenant's obligations under the Lease; provided that if at any time during the Term of the Lease, Guarantor divests itself of more than 50% of the outstanding shares of Tenant, then this Guaranty shall terminate if, at the time of the divestiture, Tenant or a substitute Guarantor if applicable, has a consolidated net worth as determined by Generally Accepted Accounting Principles equal to or in excess of Ten Million ($10,000,000) Dollars; and provided further, that the minimum period for this Guaranty shall be five (5) years from the date of this Agreement. 5 IN WITNESS WHEREOF, Guarantor has executed and delivered this Agreement as of the date first above written. WITNESS: TECHNITROL, INC. /s/ Valerie A. Miller /s/ James J. Rafferty, Jr - ----------------------------------- ---------------------------------------- James J. Rafferty, Jr. - Vice President The Guaranty and Suretyship Agreement is accepted the day and year first above written. WITNESS: RIDILLA-DELMONT /s/ Joseph Conconnon By: /s/ John M. Ridilla - ----------------------------------- ------------------------------------ John M. Ridilla /s/ Joseph Conconnon /s/ P. Richard Ridilla - ----------------------------------- ------------------------------------ P. Richard Ridilla, General Partners 6 MEMORANDUM OF LEASE This Memorandum of Lease made and entered into this 15th day of October, 1991, by and between RIDILLA-DELMONT ("Landlord"), a Pennsylvania Limited Partnership, having its principal office and place of business at P.O. Box 472, Latrobe, Pennsylvania, and ADVANCED METALLURGY INCORPORATED ("Tenant"), a Corporation, having an office and place of business at 1028 East Smithfield Street, P.O. Box 91 Boston, McKeesport, Pennsylvania 15135-0091, and having an additional office in the Commonwealth of Pennsylvania (after the Commencement Date of this Lease) at Murray Corporate Park, Murrysville, Pennsylvania 15668. W I T N E S S E T H WHEREAS, on the date hereof, Landlord and Tenant entered into a certain Lease Agreement (hereinafter "Lease"); and WHEREAS, Landlord and Tenant are desirous of entering into this Memorandum of Lease pursuant to the provisions of the Act of General Assembly of Pennsylvania of June 2, 1959, P.L. 454. NOW, THEREFORE, intending to be legally bound, Landlord and Tenant hereby set forth the following information with respect to the Lease. 1. The name of the Landlord is RIDILLA-DELMONT. 2. The name of the Tenant is ADVANCED METALLURGY INCORPORATED. Exhibit "D" 3. The parties set forth that the address of the parties are: RIDILLA-DELMONT ADVANCED METALLURGY INCORPORATED P.O. Box 472 1028 East Smithfield Street Latrobe, PA 15650 McKeesport, PA 15135-0091 LANDLORD TENANT after possession: same as above. 4. The date of the Lease is the date hereof. 5. The description of the Leased Premises in the form set forth in the Lease is as set forth in Exhibit "A", attached hereto. 6. The date of the commencement of the term of the Lease is November 1, 1991. 7. The term of the Lease begins on the Commencement Date and terminates on the last day of the one hundred twentieth (120th) full month thereafter. 8. Tenant has no right or option to extend the Lease Term. 9. Landlord may as of the date hereof, or at any time subsequent thereto, assign the Lease and all rentals thereunder to Johnstown Bank and Trust Company, as security for payment of indebtedness of Landlord unto Johnstown Bank and Trust Company. IN WITNESS WHEREOF, the undersigned Landlord and Tenant hereby execute this Agreement as of the day and year first above written. Attest: RIDILLA-DELMONT /s/ Joseph Conconnon /s/ John M. Ridilla - ----------------------------------- ---------------------------------------- General Partner /s/ Joseph Conconnon /s/ Richard P. Ridilla - ----------------------------------- ---------------------------------------- General Partner Attest: ADVANCED METALLURGY INCORPORATED /s/ Valerie A. Miller By: /s/ James J. Rafferty, Jr. - ----------------------------------- ------------------------------------ James J. Rafferty, Jr. - President 2 COMMONWEALTH OF PENNSYLVANIA ) ) SS: COUNTY OF WESTMORELAND ) Before me, a Notary Public, the undersigned authority, personally appeared JOHN M. RIDILLA and P. RICHARD RIDILLA, the General Partners of RIDILLA-DELMONT, a Pennsylvania Limited Partnership, being known to be (or satisfactorily proven) to be the persons signing the within Memorandum of Lease. WITNESS my official hand and seal this 15th day of October, 1991. /s/ Darlene L. Hans ---------------------------------------- [SEAL] COMMONWEALTH OF PENNSYLVANIA ) ) SS: COUNTY OF ALLEGHENY ) Before me, a Notary Public, the undersigned authority, personally appeared James J. Rafferty, Jr. - President, of ADVANCED METALLURGY INCORPORATED, being known to be (or satisfactorily proven) to be the President of the said Corporation, being authorized to do so and that he signed the within Memorandum of Lease for the purposes set forth therein. WITNESS my official hand and seal this 15th day of October, 1991. /s/ Darlene L. Hans ---------------------------------------- [SEAL] EX-10.7 4 w56785a1ex10-7.txt INCENTIVE COMPENSATION PLAN OF TECHNITROL, INC. Exhibit 10.7 AMENDMENT TO INCENTIVE COMPENSATION PLAN The Technitrol, Inc. Incentive Compensation Plan (the "Plan") is hereby amended as follows: 1. The first sentence of Section 4(b) of the Plan shall be deleted in its entirety and replaced with the following: "To the extent that shares of Common Stock of the Company are used as incentives under the Plan, the aggregate number of shares, on a cumulative basis, which may be issued under the Plan shall not exceed 4,900,000, as appropriately adjusted in the event of one or more stock split-ups or split-downs, a combination of shares or recapitalizations, or by reason of stock dividends." 2. The first sentence of Section 7 of the Plan shall be deleted in its entirety and replaced with the following: "The Plan will terminate on the earliest of (1) the date of termination specified in any resolution which may be adopted by the Board of Directors; or (2) the granting of the maximum number of shares of Common Stock available under the Plan, as amended from time to time; or (3) December 31, 2011, the stated termination date." 3. Except as expressly set forth in this Amendment to the Plan, the Plan is hereby ratified and confirmed without modification. 4. The effective date of this Amendment to the Plan shall be February 13, 2001. INCENTIVE COMPENSATION PLAN OF TECHNITROL, INC. An Incentive Compensation Plan ("Plan") is hereby adopted for the key employees of Technitrol, Inc. ("Company") and its subsidiaries effective as of the 1st day of January, 1981. 1. Purposes. The Company's Plan is intended to provide a method whereby key employees ("Employees") of the Company and its subsidiaries who are largely responsible for the special services of planning, management, growth and protection of the business, may be offered incentives in addition to those of current compensation and future pensions to continue in the service of the Company and all of its stockholders. The Plan is also intended to enable the Company to obtain and retain the services of Employees by providing them with such incentives as may be provided upon the terms and conditions hereinafter set forth. 2. Administration. This Plan shall be administered by a committee ("Committee") consisting of three directors to be appointed by the Board of Directors, none of whom shall be employees of the Company or its subsidiaries or otherwise entitled to participate under this Plan. The Committee shall interpret the Plan and to the extent and in the manner contemplated herein, it shall exercise the discretion granted to it as to the determination of who shall participate in the Plan and the nature and extent of the incentives granted to each participant and shall also adopt such rules and regulations for the administration of the Plan as it deems advisable. 3. Eligible Employees. Employees shall mean (i) executive employees of the Company and its subsidiaries, (ii) key employees of each of the operating divisions and subsidiaries of the Company in the areas of sales and marketing, engineering and technical design, manufacturing, quality assurance, and financial, and (iii) such other employees in recognition of outstanding performance or unique contributions of ideas or inventions, as an incentive to employment, or for such other reasons deemed appropriate by the Committee. Employees shall be selected by the Committee for participation. No member of the Board of Directors of the Company may participate in the Plan unless he is also an Employee of the Company or its subsidiaries. A member of the Committee may not participate. 4. Types of Incentives. The Committee shall have the authority to develop and implement forms of incentive compensation, which may be awarded to a single Employee or group of Employees, in the manner and in the amounts determined by the Committee, it being the purpose and intent of the Plan to afford the Committee the greatest flexibility in providing incentives to management. Such incentive compensation may include (but shall not necessarily be limited to) restricted stock grants, performance unit shares, and stock appreciation rights, subject to the following conditions and limitations: (a) The types of incentives shall be chosen with regard to their utility for inducing longer-term service (three years or more) to the Company on the part of Employees. (b) To the extent that shares of Common Stock of the Company are used as incentives under the Plan, the aggregate number of shares, on a cumulative basis, which may be issued under the Plan shall not exceed 100,000 as appropriately adjusted in the event of one or more stock split-ups or split-downs, a combination of shares or -2- recapitalizations, or by reason of stock dividends. Such shares shall be made available, at the discretion of the Board of Directors, either from authorized but unissued shares of Common Stock or from shares reacquired by the Company, including shares purchased on the open market. If, prior to the termination of the Plan, shares issued under the Plan have been returned to the Company by virtue of any restrictions imposed by the Committee, such shares shall again become available for issuance under the Plan. (c) Performance goals developed under the Plan, if any, shall be chosen on a long-term basis. 5. Special Provisions Relating to Stock Incentives. The Committee shall have the authority to impose such restrictions, terms and conditions upon any grant of shares of Common Stock hereunder as it may deem appropriate under the circumstances, including but not limited to, restrictions on transfer. In addition, the Committee may impose restrictions under the Securities Act of 1933, as amended, under the requirements of any stock exchange upon which such shares are then listed, and under any Blue Sky or state securities laws applicable to such shares. In order to enforce the restrictions imposed upon shares hereunder, the Committee may cause a legend(s) to be placed on any certificate(s) representing shares issued pursuant to this Plan, which legend(s) shall make appropriate reference to the restrictions imposed hereunder. 6. Amendments. This Plan may be amended at any time by the Board of Directors of the Company; provided, however, that no such amendment shall increase the maximum -3- aggregate number of shares of Common Stock that may be issued pursuant to this Plan without the approval of the shareholders of the Company. 7. Termination. The Plan will terminate on the earliest of (1) the date of termination specified in any resolution which may be adopted by the Board of Directors; or (2) the granting of the maximum number of shares of Common Stock available under the Plan, as amended from time to time; or (3) December 31, 1991, the stated termination date. The termination of the Plan, however, shall not affect any restrictions previously imposed on any incentives granted pursuant to the Plan. 8. Successors and Assigns. The provisions of this Plan shall be binding upon all successors and assigns of any Employee awarded incentives under this Plan, including, without limitation, the estate of any such Employee and the executors, administrators or trustees of such estate, and any receiver, trustee in bankruptcy or representative of the creditors of any such Employee. -4- EX-10.8 5 w56785a1ex10-8.txt SUPPLEMENTAL RETIREMENT PLAN EXHIBIT 10.8 TECHNITROL, INC. SUPPLEMENTAL RETIREMENT PLAN AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2002 TABLE OF CONTENTS
PAGE ---- ARTICLE I PURPOSE CLAUSE ...................................................... 1 ARTICLE II DEFINITIONS ......................................................... 1 ARTICLE III BENEFITS ............................................................ 3 ARTICLE IV ADMINISTRATION ...................................................... 6 ARTICLE V AMENDMENT AND TERMINATION ........................................... 8 ARTICLE VI CHANGE IN CONTROL ................................................... 9 ARTICLE VII MISCELLANEOUS ....................................................... 11
- i - TECHNITROL, INC. SUPPLEMENTAL RETIREMENT PLAN AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2002 ARTICLE I PURPOSE CLAUSE This Plan was originally established solely for the purpose of providing benefits to certain employees of Technitrol, Inc. and its affiliated companies that would have been payable to them under the Technitrol, Inc. Retirement Plan but for the limitation placed on the amount of their Compensation that can be taken into account under Section 401(a)(17) of the Internal Revenue Code. This Plan is amended and restated to provide for enhanced supplemental retirement benefits for eligible employees offset by their accrued benefits under the Technitrol, Inc. Retirement Plan. The Plan is intended to constitute an unfunded plan primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. ARTICLE II DEFINITIONS 2.1 "Actuarially Equivalent" shall mean equality in value of the aggregate amounts expected to be received under different benefit forms (other than lump sums pursuant to Article VI) or the same form commencing at different points of time as determined using the actuarial equivalent assumptions set forth in the Retirement Plan. 2.2 "Administrator" shall mean Technitrol, Inc. 2.3 "Code" shall mean the Internal Revenue Code of 1986, as from time to time amended. 2.4 "Company" shall mean Technitrol, Inc. and any affiliated company which participates in the Technitrol, Inc. Retirement Plan. 2.5 "Compensation" shall mean the amount of base salary and cash bonus (not in excess of 75% of base salary in the calendar year in which it is paid) paid during the calendar year by the Company to a Participant. 2.6 "Effective Date" shall mean January 1, 1994. The Effective Date of this amended and restated Plan shall mean January 1, 2002. 2.7 "Early Retirement Date" of a Participant shall mean the first day of the calendar month coincident with or the next month following the date such a Participant attains age 55 and completes five (5) Years of Vesting Service. 2.8 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as from time to time amended. 2.9 "Final Average Compensation" shall mean the average of the Participant's Compensation during the highest three (3) consecutive calendar years out of the last ten (10) calendar years prior to the Participant's termination of employment or retirement. 2.10 "Normal Retirement Age" shall mean the later of the attainment of age 65 or the fifth anniversary of participation in the Retirement Plan. 2.11 "Participant" shall mean any employee of the Company who participates in Technitrol's Executive Short-Term Cash Incentive Plan and any other employee of the Company designated by the Board of Directors of Technitrol, Inc. as eligible to participate in the Plan. 2.12 "Plan" means the Technitrol, Inc. Supplemental Retirement Plan, as from time to time amended. - 2 - 2.13 "Retirement Plan" shall mean the Technitrol, Inc. Retirement Plan, as from time to time amended. 2.14 "Years of Service" shall mean the number of years of credited service that the Participant has earned under the Retirement Plan plus such additional years of service that the Participant is entitled to pursuant to the Plan (pursuant to Section 3.5). 2.15 "Years of Vesting Service" shall mean the number of years of vesting service that the Participant has earned under the Retirement Plan plus such additional years of vesting service that the Participant is entitled to pursuant to the Plan (pursuant to Section 3.5). ARTICLE III BENEFITS 3.1 Normal Retirement. (a) A Participant who retires on or after the Normal Retirement Age with 20 or more Years of Service shall be entitled to receive annually, commencing as of the first day of the month following the date of retirement, a single life annuity (payable in equal monthly installments) equal to the difference between (i) and (ii) below: (i) 45% of Final Average Compensation (ii) The amount of the Participant's accrued benefits (in the form of a straight life annuity) under the Retirement Plan as of the date of retirement. (b) For a Participant with less than 20 Years of Service, the annual amount of retirement benefit determined in Section 3.1(a)(i) above shall be multiplied - 3 - by a fraction, the numerator of which is equal to his Years of Service and the denominator of which is 20. (c) As an alternative to receiving benefits in the form of a single life annuity, the Participant may elect in writing, at least one year prior to retirement, to receive benefits in one of the optional forms as set in Section 3.3. If the Participant elects to receive benefits in one of the optional forms, such benefits shall be adjusted using the same assumptions that are used to calculate optional forms of benefits (other than lump sums) under the Retirement Plan. 3.2 Early Retirement. Upon retirement on or after his/her Early Retirement Date and prior to Normal Retirement Age, a Participant shall be entitled to receive, commencing as of the first day of the month following the date of retirement, one of the following: (a) If a Participant has 20 or more Years of Service at termination, a single life annuity determined in accordance with Section 3.1(a), based on Years of Service at termination. The benefit determined under the formula in Section 3.1(a)(i) is reduced by 5% per year (prorated based on months) by which payments commence prior to the attainment of age 62 and the offset benefit determined under the formula in Section 3.1(a)(ii) is reduced according to Section 5.2(b) under the Retirement Plan. If payments commence on or after the attainment of age 62, the benefit under the formula in Section 3.1(a)(i) is unreduced, but the offset benefit determined under the formula in Section 3.1(a)(ii) shall be reduced according to Section 5.2(b) under the Retirement Plan if payments commence prior to age 65. - 4 - (b) If a Participant has less than 20 Years of Service at termination, a single life annuity determined in accordance with Section 3.1(b), based on Years of Service at termination and reduced by 1/15 for each of the first five (5) years and 1/30 for each of the next five (5) years (prorated based on months) by which payments commence prior to Normal Retirement Age. (c) A Participant may elect in writing, at least one year prior to retirement, to receive benefits commending at any time on or before his/her Normal Retirement Age in the form of a single life annuity or an annuity in one of the optional forms described in Section 3.3, as determined in accordance with the provisions of Section 3.1 and 3.2. A Participant who terminates prior to his/her Early Retirement Date with five or more Years of Vesting Service shall be entitled to receive, commencing as of the first day of the month following the attainment of Normal Retirement Age, a single life annuity as determined in accordance with Section 3.1. Alternatively, such a Participant may elect in writing, at least one year prior to his/her Early Retirement Date, to receive benefits, commencing at any time on or after his Early Retirement Date and before his/her Normal Retirement Age, in the form of a single life annuity or an annuity in one of the optional forms described in Section 3.3, as determined in accordance with the provisions of Section 3.1 and 3.2. 3.3 Forms of Benefit. Subject to the provisions of Section 3.1 and 3.2, a Participant may elect to receive his benefits in one of the following Actuarially Equivalent forms: (a) a life annuity in level monthly payments, with either 60, 120 or 180 months certain. Such payments shall be made to the Participant for life and shall - 5 - continue to be paid to the designated beneficiary of the Participant for the period after the Participant's death and before expiration of the months certain. (b) a joint and survivor annuity continuing for life in level monthly payments to the Participant and thereafter for life in level monthly payments to his designated beneficiary, at either 50% or 100% (as stated in the election) of the payments to the Participant. 3.4 Death. In the event of the death of a married Participant prior to the commencement of benefits under the Retirement Plan, and if the Participant was married to his spouse throughout the one-year period preceding the date of his death, his surviving spouse shall be entitled to receive benefits from this Plan equal to the survivor portion of a joint and 50% survivor annuity that would be payable to the Participant under the Plan had the Participant retired and elected an immediate joint and 50% survivor annuity on the day before his death, offset by the Actuarially Equivalent value of the survivor's benefits actually payable to his surviving spouse under the Retirement Plan. 3.5 Prior Service Credit. For purposes of determining benefits under this Plan, James M. Papada, III and Grace Greco shall be entitled to 15 Years of Service and 15 Years of Vesting Service of prior service credit, effective as of June 30, 1999. ARTICLE IV ADMINISTRATION 4.1 The Plan shall be administered by the Administrator, who shall have the discretionary authority to interpret the Plan, to determine eligibility for benefits hereunder, and to determine the nature and amount of benefits. Any construction or - 6 - interpretation of the Plan and any determination of fact in administering the Plan made in good faith by the Administrator shall be final and conclusive for all Plan purposes. 4.2 (a) The Administrator shall prescribe a form for the presentation of claims under the terms of this Plan. (b) Upon presentation to the Administrator of a claim on the prescribed form, the Administrator shall make a determination of the validity thereof. If the determination is adverse to the claimant, the Administrator shall furnish to the claimant within 90 days after the receipt of the claim a written notice setting forth the following: (i) the specific reason or reasons for the denial; (ii) specific responses to pertinent provisions of the Plan on which the denial is based; (iii) a description of any additional materials or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (iv) appropriate information as to the steps to be taken if the claimant wishes to submit his or her claim for review. (c) In the event of a denial of a claim, the claimant or his duly authorized representative may appeal such denial to the Administrator for a full and fair review of the adverse determination. Claimant's request for review must be in writing and made to the Administrator within 60 days after receipt by claimant of the written notification required under Section 4.2(b); provided, however, such 60-day period shall - 7 - be extended if circumstances so warrant. Claimant or his duly authorized representative may submit issues and comments in writing which shall be given full consideration by the Administrator in its review. (d) The Administrator may, in its sole discretion, conduct a hearing. A request for a hearing made by claimant will be given full consideration. At such hearing, the claimant shall be entitled to appear and present evidence and be represented by counsel. (e) A decision on a request for review shall be made by the Administrator not later than 60 days after receipt of the request; provided, however, in the event of a hearing or other special circumstances, such decision shall be made not later than 120 days after receipt of such request. If it is necessary to extend the period of time for making a decision beyond 60 days after the receipt of the request, the claimant shall be notified in writing of the extension of time prior to the beginning of such extension. (f) The Administrator's decision on review shall state in writing the specific reasons and references to the Plan provisions on which it is based. Such decision shall be promptly provided to the claimant. If the decision on review is not furnished in accordance with the foregoing, the claim shall be deemed denied on review. ARTICLE V AMENDMENT AND TERMINATION 5.1 Technitrol, Inc. may amend the Plan in any manner and at any time by action of the Board of Directors; provided, however, that no amendment shall deprive any Participant or his surviving spouse of any benefit accrued hereunder as of the date of adoption of such amendment as determined under Section 5.3, below. - 8 - 5.2 Technitrol, Inc. reserves the right to terminate this Plan at any time, in which case the benefits payable to any Participant shall be limited to those accrued hereunder as of the effective date of termination, as determined under Section 5.3, below. 5.3 For purposes of Section 5.1 and 5.2, above, the benefit accrued by a Participant as of the date of adoption of an amendment to the Plan or the effective date of termination of the Plan shall be computed under Sections 3.1 or 3.2, whichever is applicable, as if the Participant has terminated employment on such date. ARTICLE VI CHANGE IN CONTROL 6.1 Notwithstanding anything to the contrary in the Plan, in the event there is a "change in control" of Technitrol, Inc., each Participant who is employed by the Company immediately prior to the change in control shall be entitled to receive benefits under this Plan (whether or not they are so employed by the Company or any successor to it after the change in control) equal to the excess of (i) the benefits that the Participant would have accrued under the Plan if his or her total Years of Service credited under the Plan included an additional five years (and, in the case of James M. Papada, III and Grace Greco, included, in addition to such additional five years, such additional years of credited service as provided in Section 3.5), as of the date of change in control over (ii) the vested benefits that the Participant has actually accrued under the Retirement Plan as of the date of change in control. 6.2 In the event of a change in control, a Participant shall be treated as fully vested in his right to receive benefits under this Plan regardless of whether the - 9 - Participant is fully vested in his accrued benefits under the Retirement Plan or whether the Participant terminates employment on or after the change in control. 6.3 In the event of a change in control, a Participant shall be entitled to receive a lump sum payment of the present value of the benefits that he has accrued under the Plan (calculated taking into account the provisions of Section 6.1 above) within ten days of the date on which the change in control occurs. The present value of the lump sum payment shall be determined by using the RP-2000 Mortality Table for Males and an interest rate (rounded to the nearest 2/10 of 1 percent) equal to 120 percent of the applicable Federal mid-term rate in effect under Section 1274(d)(1) of the Code for the month in which the change in control occurs. 6.4 In addition to the lump sum payment described in Section 6.3, above, a Participant shall be entitled to receive an additional payment, within ten days following the change in control, of an amount that is sufficient to reimburse the Participant for any federal, state or local taxes (including, but not limited to, excise tax penalties) as a result of the payment of such lump sum and as a result of the additional payment to him pursuant to this Section 6.4, regardless of whether such payments, or any portion of them, are considered "excess parachute payments" under Section 280G of the Code. Such additional payment shall be calculated by assuming the Participant is subject to the highest marginal federal, state and local tax rates then in effect. 6.5 In the event a Participant receives a lump sum payment of benefits pursuant to this Article VI, but continues employment with the Company subsequent to the change in control, the Participant shall be eligible to continue to accrue benefits under this Plan but shall not be entitled to receive a duplication of benefits previously - 10 - paid to him pursuant to this Article. The Company has the sole authority and discretion to determine the factors used to make the adjustment under this Section 6.5 and to determine the accruals already paid. 6.6 For purposes of this Article, the term "change in control" means the occurrence of either of the following events: (a) any "Person" or "Persons" as defined in Sections 13(d) and 14(b) of the Securities Exchange Act of 1934, as amended (the "Act"), is or becomes the "beneficial owner" (as defined in Rule 13(d)-3 of the Act), directly or indirectly, of securities of Technitrol, Inc. representing more than twenty-five percent (25%) of the combined voting power of Technitrol, Inc.'s then outstanding securities or (b) more than fifty percent (50%) of the assets of Technitrol, Inc. and its subsidiaries, which are used to generate more than 50% of the earnings of Technitrol, Inc. and its subsidiaries in any one of the last three fiscal years, are disposed of, directly or indirectly, by Technitrol, Inc. (including stock or assets of a subsidiary(ies)) in a sale, exchange, merger, reorganization or similar transaction. ARTICLE VII MISCELLANEOUS 7.1 Nothing contained herein shall be construed as providing for assets to be held in trust or escrow or any other form of asset segregation for the Participant or the Participant's surviving spouse, the Participant's only interest being the right to receive benefits set forth herein. To the extent that the Participant or any other person acquires a right to receive benefits under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. 7.2 Nothing contained in this Plan shall be construed as a contract of employment between the Company and any Participant, or as a right of any Participant - 11 - to be continued in employment of the Company, or as a limitation on the right of the Company to discharge any of its employees, with or without cause. 7.3 The benefits payable hereunder or the right to receive future benefits under the Plan may not be anticipated, alienated, pledged, encumbered, or subject to any charge or legal process. 7.4 This Plan shall be interpreted in accordance with the laws of the Commonwealth of Pennsylvania, except to the extent superseded by ERISA. IN WITNESS WHEREOF, Technitrol, Inc. has caused this Plan to be executed by its authorized officers and its corporate seal to be impressed hereon this 2nd day of February, 2002. ATTEST: TECHNITROL, INC. /s/ Drew A. Moyer By: /s/ David W. Lacey - ---------------------------------- ------------------------------------- [Seal] - 12 - EX-10.9 6 w56785a1ex10-9.txt AGREEMENT BETWEEN TECHNITROL & JAMES PAPADA III Exhibit 10.9 AGREEMENT THIS AGREEMENT made this 1st day of July, 1999, by and between TECHNITROL, INC. (the "Company") and JAMES M. PAPADA, III (the "Employee"). WHEREAS, the Company has adopted a nonqualified deferred compensation plan known as the Technitrol, Inc. Supplemental Retirement Plan (the "Plan"); WHEREAS, the Company has incurred or expects to incur liability under the terms of such Plan with respect to the Employee and his beneficiary; WHEREAS, the Company desires to ensure that the Employee shall receive the benefits due him under the terms of such Plan as a result of a "change of control" of the Company. NOW, THEREFORE, intending to be legally bound, the Company and the Employee agree as follows: 1. Notwithstanding the provisions of the Plan to the contrary, in the event of a "change of control," as defined below, the Company shall, as soon as possible, but in no event later than ten (10) days following the change of control, make a payment to the Employee in cash or property (whichever is satisfactory in the absolute discretion of the Employee) of the amount that is sufficient to pay the Employee and his beneficiary the benefits that he has accrued under the Plan as of the date on which the change of control occurs. An independent actuary selected by the Company and agreed to by the Employee shall determine the amount of benefits that the Employee has accrued under the Plan. 2. For purposes of this Agreement, the term "change of control" shall mean the occurrence of either of the following: a. any "Person" or "Persons," as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Act"), is or becomes the "Beneficial Owner" (as defined in Rule 13(d)-3 of the Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities; or b. more than fifty percent (50%) of the assets of the Company are disposed of, directly or indirectly, by the Company (including stock or assets of a subsidiary(ies) in a sale, exchange, merger, reorganization or similar transaction). 3. In the event the Employee elects to receive payment in the form of a lump sum in cash, the present value of the lump sum amount shall be calculated by an independent actuary selected by the Company and agreed to by the Employee. For purposes of determining the present value of the Employee's benefits to be paid in a lump sum, the independent actuary shall use 1983 Group Annuity Mortality Table and an interest rate (rounded to the nearest 2/10 of one percent) equal to 120% of the applicable federal mid-term rate in effect under Section 1274(d)(1) of the Internal Revenue Code of 1986, as amended (the "Code"), for the month in which the "change of control," as defined above, occurs. 4. In the event the Employee elects to receive the benefits payable to him hereunder in the form of property, the Company shall purchase such annuity from an insurance company which is satisfactory to the Employee, in his discretion, and shall deliver the annuity contract to the Employee. 5. In addition to the lump sum payment of cash or an annuity, whichever is elected by the Employee, the Company agrees to pay the Employee an additional bonus payment, within ten (10) days following the change of control, of an amount that is sufficient to reimburse the Employee for any federal, state or local taxes (including, but not limited to, excise tax penalties) that he would otherwise be responsible to pay as a result of the payment of such lump sum or annuity or as a result of the payment of such additional bonus amount to him, including but not limited to amounts which would be payable were such payments, or any portion of them, be considered "excess parachute payments" under Section 280G of the Code. 6. Employee agrees that, to the extent that he receives payment in full of the benefits provided for in this Agreement, the Company shall have no further liability to pay him any benefits otherwise due him pursuant to the Plan. 7. Neither party to this Agreement shall institute a proceeding in any court or administrative agency to resolve a dispute between the parties hereunder before that party has sought to resolve the dispute through direct negotiation with the other party. If the dispute is not resolved within three weeks after a demand for direct negotiation, the parties shall attempt to resolve the dispute through mediation. If the parties do not promptly agree on a mediator, then either party may notify the CPR Institute for Dispute Resolution, 366 Madison Avenue, New York, New York, to initiate selection of a mediator from the CPR Panel of Neutrals. The fees and expenses of the mediator shall be paid one-half each by the Company and the Employee. If the mediator is unable to facilitate a settlement of the dispute within a reasonable period of time, as determined by the mediator, the mediator shall issue a written statement to the parties to that effect and the aggrieved party may then seek relief through arbitration, which shall be binding, before a single arbitrator pursuant to the commercial Arbitration Rules of the American Arbitration Association (the "Association"). The place of arbitration shall be New York, New York. Arbitration may be commenced at any time by any party hereto after giving written notice to the other party. The arbitrator shall be selected by the joint agreement of the Company and the Employee, but if they do not agree within twenty (20) days after the date of the notice referred to above, the selection shall be made pursuant to the rules from the panels of the arbitrators maintained by such Association. The arbitrator shall render his decision within one hundred twenty (120) days of appointment. Any award rendered by the arbitrator shall be conclusive and binding upon the parties hereto; provided, however, that any such award shall be accompanied by a written opinion of the arbitrator giving the reasons for the award. This provision for arbitration shall be specifically enforceable by the parties and the decision of the arbitrator in accordance herewith shall be final and binding and there shall be no right of appeal therefrom. Judgment upon the award rendered by the arbitration may be entered by a court having jurisdiction thereof. The costs and expenses of arbitration, including attorneys' fees and expenses of the arbitrator, shall be paid entirely by the substantially non-prevailing party and in addition the substantially non- prevailing party shall reimburse the other party for the fees and expenses of mediation incurred by such party, unless the arbitrator determines that the costs, expenses and attorney's fees should be apportioned between the parties, then as the arbitrator may assess. The arbitrator shall not be permitted to award punitive or similar type damages under any circumstances. This arbitrator provision shall constitute the sole an exclusive remedy for any dispute under this Agreement. 8. Any amounts payable under this Agreement to the Employee shall not be deemed salary or other compensation to the Employee for the purpose of computing benefits to which he may be entitled under any other pension plan or other arrangement of the Company for the benefit of its employees. 9. If any of the provisions of this Agreement shall be held invalid, the remainder of this Agreement shall not be affected thereby. 10. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, and the Employee and his heirs, executors, administrators and legal representatives. Notwithstanding the foregoing, the right to receive payment hereunder is hereby expressly declared to be personal, nonassignable and nontransferable except by will or intestacy, and in the event of any attempted assignment or transfer of such rights contrary to the provisions hereof, Employer shall have no further liability for payments hereunder. 11. This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. The Agreement may only be amended by an agreement in writing signed by each of the parties. IN WITNESS WHEREOF, this Company has by its appropriate officers signed this Agreement and affixed its seal and the Employee has signed this Agreement, on and as of the day and year first written above. TECHNITROL, INC. By: /s/ David W. Lacey -------------------------------- JAMES M. PAPADA, III /s/ James M. Papada, III ------------------------------------ Technitrol 1210 Northbrook Drive, Suite 385 Trevose, PA 19053-8406 USA Tel 215 355 2900 http://www.technitrol.com April 23, 2001 Mr. James M. Papada, III [ADDRESS OMITTED] Dear Jim: This letter will confirm the amendment of the terms of the Agreement between you and Technitrol, Inc. (the "Company"), dated July 1, 1999 (the "Agreement"), which relates to the benefits due to you under the terms of the Technitrol, Inc. Supplemental Retirement Plan (the "Plan") after a "change of control" of the Company. The Company has amended the Plan to provide for certain additional benefits for participants in the event of a "change in control" of the Company and has amended the Plan to include a definition of "change in control" which, though now consistent in all of the Company's plans, nonetheless differs from the definition of "change of control" in the Agreement. For good and valuable consideration, we have agreed to amend the Agreement, effective as of the date of this letter, to provide that the term "change of control", as used in the Agreement, shall be changed to "change in control", as defined in the Plan and the benefit calculation is made using the same mortality table. Therefore, we hereby amend Paragraph 2 in the Agreement to delete subsections (a) and (b) in their entirety and insert in their place the following: (a) any "Person" or "Persons," as defined in Sections 13(d) and 14(b) of the Securities Exchange Act of 1934, as amended (the "Act"), is or becomes the "Beneficial Owner" (as defined in Rule 13(d)-3 of the Act), directly or indirectly, of securities of Technitrol, Inc. representing more than twenty five percent (25%) of the combined voting power of Technitrol, Inc.'s then outstanding securities; or (b) more than fifty percent (50%) of the assets of Technitrol, Inc. and its subsidiaries, which are used to generate more than 50% of the earnings of Technitrol, Inc. and its subsidiaries in any one of the last three fiscal years, are disposed of, directly or indirectly, by Technitrol, Inc. (including stock or assets of a subsidiary(ies)) in a sale, exchange, merger, reorganization or similar transaction). April 23, 2001 Page 2 of 2 In addition, we amend Paragraph 3 of the Agreement by deleting the reference to the "1983 Group Annuity Mortality Table" and insert in its place the "RP-2000 Mortality Table for Males." All of the other terms and conditions of the Agreement will remain in full force and effect and nothing contained above shall be held to alter, vary or affect any of the terms, provisions or conditions of the Agreement other than as expressly stated therein. If the foregoing accurately reflects our agreement, would you please sign below where noted. Sincerely, /s/ David W. Lacey - ------------------------------- David W. Lacey Vice President, Human Resources ACCEPTED AND AGREED: /s/ David W. Lacey /s/ James M. Papada, III - ------------------------------- ------------------------------- David W. Lacey James M. Papada, III EX-10.10 7 w56785a1ex10-10.txt LETTER AGREEMENT BETWEEN TECHNITROL & PAPADA... EXHIBIT 10.10 Technitrol 1210 Northbrook Drive, Suite 385 Trevose, PA 19053-8406 USA Tel 215 355 2900 http://www.technitrol.com April 16, 1999 Mr. James M. Papada, III [ADDRESS OMITTED] Dear Jim: This letter will confirm the financial terms of your employment as Chairman, Chief Executive Officer and President of Technitrol, Inc. 1. Base Salary Beginning July 1, 1999 - the effective date of your appointment as President and CEO - and through December 31, 1999, you will be paid a salary of $220,000 plus a guaranteed bonus of $30,000 (payable on December 31, 1999 or in early January, at your election). Effective January 1, 2000, your base salary will be $500,000 and you will not have a guaranteed bonus. 2. Benefits You will participate in all Technitrol benefit plans, effective with your hire date of July 1, 1999. 3. Pension Plan Technitrol will establish a Supplemental Executive Retirement Plan (SERP) for you and for purposes of your participation in the SERP you shall be deemed to have completed 15 years of service with Technitrol on June 30, 1999. The funding for your SERP will be done through a Rabbi Trust with no annuity provision. Mr. James M. Papada, III April 16, 1999 Page 2 4. Incentive Compensation Plan You will participate in the cash portion of the Executive Incentive Plan (effective July 1, 1999) or in any plan which is a successor to such plan. The effective start date of your participation is July 1, 1999. The performance period is from July 1 - December 31, 1999 and annually thereafter. 5. Vacation You will receive 4 weeks of vacation annually. 6. Performance Based Restricted Stock (a) Technitrol is awarding you Performance Based Restricted Stock according to this schedule:
SHARES GRANT DATE VESTING DATE ------ ---------- ------------ 20,000 7-1-99 3-01-02 15,000 1-1-00 3-01-03 10,000 1-1-01 3-01-04 10,000 1-1-02 3-01-05 10,000 1-1-03 3-01-06 10,000 1-1-04 3-01-07
Vesting of PBRS will occur if Technitrol achieves the fully diluted earnings per share ("EPS") as determined by the Board of Directors in the operating plan for such year. For example, the initial PBRS grant of 20,000 shares will vest if Technitrol achieves the EPS target approved by the Board of Directors for the operating year 2001. Mr. James M. Papada, III April 16, 1999 Page 3 If the EPS targets are not achieved in the relevant year, then no PBRS shares will vest for that performance period, provided that the Board of Directors can (but is under no obligation to) elect to pro-rate the vesting of such shares for such period in any way it determines. (b) In any year in which PBRS vests, Technitrol will pay you a cash bonus equal to the federal and state tax due as a result of such vesting (including the tax on the bonus amount) at the highest marginal combined federal and state tax rates applicable to you in the year in which such income is realized by you. 7. Executive Assistant You are authorized to hire your current Executive Assistant to join you at Technitrol as your Executive Assistant upon the terms and conditions set forth in the offer letter from Technitrol to her dated April 21, 1999. 8. Change in Control In the event of a "change in control," on the effective date of such change in control: (a) You will be paid two years base salary at your current salary rate. (b) You will be paid a cash bonus in the maximum amount then allowed by the Executive Incentive Plan. (c) All of your granted PBRS (see paragraph 6 above) vests immediately in full and all PBRS not yet granted shall be granted and shall vest immediately in full: The provisions of subsection (b) of paragraph 6 will also apply. (d) The SERP referred to in paragraph 3 above will be funded in full in a manner reasonably satisfactory to you and the Company will pay you a bonus computed as described in paragraph 6(b) above as a result of the income realized by you as a result of the purchase of such annuity (or other funding mechanisms satisfactory to you). Mr. James M. Papada, III April 16, 1999 Page 4 (e) "Change in Control" means either of the following: (A) any "Person" or "Persons" as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Act") is or becomes the "beneficial owner" (as defined in Rule 13d-3 of the Act), directly or indirectly, of securities of Technitrol representing more than 50% of the combined voting power of Technitrol's then outstanding securities; or (B) more than 50% of the assets of Technitrol are disposed of, directly or indirectly, by Technitrol (including stock or assets or a subsidiary(ies)) in a sale, exchange, merger, reorganization or similar transaction. 9. Excess Parachute Payments In the event that any compensation or remuneration paid to you by Technitrol is deemed to be "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended, and as a result you are subject to excess tax with respect to such payments, Technitrol will pay you, in addition to any other payments or benefits to which you are otherwise entitled, an amount that, taking into account any income or excess taxes payable with respect to such payment, would result in you receiving the amount you would have received initially if excess taxes were not imposed on such payment deemed to be excess parachute payments. 10. Effective Date The effective date of this Agreement is July 1, 1999. Mr. James M. Papada, III April 16, 1999 Page 5 These ten paragraphs contain the terms and conditions agreed to between you and Technitrol and are legally binding on you and Technitrol. Except for the contents of this letter, there is no contract of employment between you and Technitrol and you are an employee at will. Sincerely, /s/ David W. Lacey David W. Lacey Vice President, Human Resources ACCEPTED AND AGREED /s/ David W. Lacey /s/ James M. Papada, III - ---------------------------------- ---------------------------------- David W. Lacey James M. Papada, III Technitrol 1210 Northbrook Drive, Suite 385 Trevose, PA 19053-8406 USA Tel 215 355 2900 http://www.technitrol.com October 18, 2000 Mr. James M. Papada, III [ADDRESS OMITTED] Dear Jim: This letter will confirm the amendment of the terms of the letter between you and Technitrol, dated April 16, 1999 (the "Letter"). For good and valuable consideration, we have agreed to: 1. Delete Section 6 of the Letter in its entirety and replace it with the following: "6. Performance Based Restricted Stock. (a) Technitrol is awarding you Performance Based Restricted Stock ("PBRS") according to this schedule:
SHARES GRANT DATE MEASURE DATE VEST DATE ------ ---------- ------------ --------- 20,000 7-1-99 12-31-00 3-31-02 15,000 1-1-00 12-31-01 3-31-03 13,333 1-1-02 12-31-02 3-31-04 13,333 1-1-03 12-31-03 3-31-05 13,334 1-1-04 12-31-04 3-31-06
Performance for PBRS will occur if Technitrol achieves the fully diluted earnings per share ("EPS") as determined by the Board of Directors in the operating plan for such year (the "Target"). For example, the initial PBRS grant of 20,000 shares will vest if Technitrol achieves the EPS target approved by the Board of Directors for the operating year 2000. October 18, 2000 Page 2 of 3 If the EPS targets are not achieved in the relevant year, then the relevant PBRS shares for that performance period would be forfeited, provided that the Board of Directors can (but is under no obligation to) elect to pro-rate the vesting of such shares for such period in any way it determines. (b) Notwithstanding the achievement of the Target, the PBRS will not vest unless you are an employee of Technitrol on the vesting date set forth in the table above unless your employment ceases by virtue of your death or complete disability in which case all PBRS for which the Target has been attained (or the Directors have granted to you pursuant to subsection 1(a) above) shall vest on the date of your death or complete disability. (c) In any year in which PBRS vests, Technitrol will pay you a cash bonus equal to the federal and state tax due as a result of such vesting (including the tax on the bonus amount) at the highest marginal combined federal and state tax rates applicable to you in the year in which such income is realized by you. 2. Delete Paragraph 8(c) of the Letter in its entirety and replace it with the following: "8. Change in Control In the event of a "change in control", on the effective date of such change in control: (a) You will be paid two years base salary at your current salary rate. (b) You will be paid a cash bonus in the maximum amount then allowed by the Executive Incentive Plan. (c) All Targets under any of the PBRS (see paragraph 6 above) shall be deemed achieved, all PBRS shall be deemed vested immediately and provisions of subsection (c) of paragraph 6 will apply. Any such PBRS not yet granted shall be immediately granted, the Targets deemed met, all such PBRS shall vest immediately in full and the provisions of subsection 6(c) above shall apply. (d) The SERP referred to in paragraph 3 above will be funded in full in a manner reasonably satisfactory to you, and the Company will pay you a bonus computed as described in paragraph 6(c) above as a result of the income realized by you as a result of the purchase of such annuity (or other funding mechanisms satisfactory to you). (e) "Change in Control" means either of the following: (A) any "Person" or "Persons" as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Act") is or becomes the "beneficial owner" (as defined in Rule 13d-3 of the Act), directly or indirectly, of securities of Technitrol representing more than 50% of the combined voting power of Technitrol's then outstanding securities; or (B) more than 50% of the assets of Technitrol are disposed of, directly or indirectly, by Technitrol (including stock or assets or a subsidiary(ies)) in a sale, exchange, merger, reorganization or similar transaction." October 18, 2000 Page 3 of 3 All of the terms and conditions in the Letter will remain in full force and effect. If the foregoing accurately reflects our agreement, would you please sign below where noted. Sincerely, /s/ David W. Lacey - ---------------------------------- David W. Lacey Vice President, Human Resources ACCEPTED AND AGREED /s/ David W. Lacey /s/ James M. Papada, III - ---------------------------------- ---------------------------------- David W. Lacey James M. Papada, III EX-23.1 8 w56785a1ex23-1.txt CONSENT OF KPMG Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Technitrol, Inc.: We consent to the use of our report included or incorporated by reference herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG LLP Philadelphia, PA February 27, 2002 -----END PRIVACY-ENHANCED MESSAGE-----